SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ______ to ______
Commission file Number 000-30105
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 84-1421483
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(State or other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
Industrial Zone Erez
P.O. Box 779
Ashkelon, Israel 78101
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(Address of Principal Executive Offices) (Zip Code)
(011) 972-7-689-1611
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-SKB. |X|
State issuer's revenue for its most recent fiscal year $10,629,600
State the aggregate market value of the voting and non-voting common equity
held by no-affiliates computed by reference to the price at which the common
equity as sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days. $1,591,100 based on a closing bid
price of $.28 on April 24, 2003.
APPLICABLE ONLY TO CORPORATE COMPANYS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of March 31, 2003 there
were 25,550,000 shares outstanding
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Defense Industries International, Inc.
FORM 10-KSB
INDEX
Page
PART I
Item 1. Description of Business............................................................................1
Item 2. Description of Properties..........................................................................15
Item 3. Legal Proceedings..................................................................................16
Item 4. Submission of Matters of a Vote of Security Holders................................................16
PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters................................................................................16
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................18
Item 7. Financial Statements...............................................................................23
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................................24
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................................................25
Item 10. Executive Compensation.............................................................................27
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stock Matters..........................................................................27
Item 12. Certain Relationships and Related Transactions.....................................................29
Item 13. Exhibits, List and Reports on Form 8-K.............................................................30
Item 14. Control Procedures.................................................................................30
Signatures....................................................................................................32
Financial Statement..........................................................................................F-1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934. These statements relate to future events
or the Company's future financial performance. The Company has attempted to
identify forward-looking statements by terminology including "anticipates,"
"believes," "expects," "can," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "potential," "predict," "should" or "will" or the
negative of these terms or other comparable terminology. Although the Company
believes that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance or achievements. The Company expectations are as of the date this
Form 10-KSB is filed, and the Company does not intend to update any of the
forward-looking statements after the date this Annual Report on Form 10-KSB is
filed to confirm these statements to actual results, unless required by law.
COMPANY HISTORY
Defense Industries International, Inc., formerly Pawnbrokers Exchange,
Inc., ("Defense Industries" or the "Company") was incorporated in the State of
Utah on July 9, 1997. Until March 25, 2002, the Company was engaged in the pawn
brokerage business, including, generally, the following: (1) the lending of
money on the security of pledged property and (2) the retail sale of
(i) merchandise forfeited upon default in the payment of collateralized loans
and (ii) new merchandise.
On May 8, 2001, the Company formed a wholly owned subsidiary, Pawnbrokers
Exchange No. One, Inc., a Utah corporation ("Pawnbrokers No. One"), and pursuant
to a Distribution Agreement, on May 30, 2001, transferred all of its properties,
assets and business operations, subject to liabilities, to this subsidiary.
On March 25, 2002, the Company, Export Erez USA, Inc., a Delaware
corporation ("Export Erez") and all of the Export Erez stockholders entered into
a Share Exchange Agreement pursuant to which the Company acquired 100% of the
outstanding securities of Export Erez, and the stockholders of Export Erez
became the controlling stockholders of the Company, owning approximately 84% of
the Company's outstanding voting securities. In connection with the Share
Exchange, the Company declared an 8 for 1 dividend on its outstanding securities
that required a mandatory exchange of stock certificates by the holders to
receive the dividend.
Following the closing of the Share Exchange, in consideration of the
assumption and indemnification of the Company and Export Erez from and against
any and all liabilities of the Company, Michael Vardakis, who was then the
Company's President, was assigned all of the Company's right, title and interest
in all of the outstanding securities of its wholly-owned subsidiary, Pawnbrokers
No. One and the Company continued the business of Export Erez.
1
ORGANIZATION
Export Erez is a holding company whose subsidiaries include Export Erez,
Ltd., Mayotex, Ltd., Dragonwear Trading Ltd. and Achidatex Nazareth Elite Ltd.
("Achidatex").
o Export Erez Ltd. was formed and registered on January 23, 1983 under
the name R.T.V. Ltd. as a limited shares company under the Companies
Ordinance of the State of Israel and changed its name to Export Erez
Ltd. on April 25, 1987. Export Erez Ltd. primarily designs, produces
and markets personal military and civilian protective equipment and
supplies such as body armor, bomb disposal suits, bulletproof vests,
and associated heavy fabric products, such as battle pouch and combat
harness units, tents and other camping equipment.
o Mayotex Ltd. was formed and registered on March 7, 1990 as a limited
liability company under the Companies Ordinance of the State of
Israel. Mayotex is engaged in weaving, improving, processing, dyeing,
cutting and sewing of fabric to make the heavy-duty and sometimes
bulletproof fabrics used by Export Erez Ltd. to manufacture its
finished products and goods.
o Dragonwear Trading Ltd. is a wholly owned subsidiary of Export Erez
Ltd. and was incorporated in Cyprus in October 2000. Dragonwear is
involved with trading textile products.
o Achidatex was formed and registered on August 2, 1977 as a limited
liability company under the Companies Ordinance of the State of
Israel. Export Erez acquired 76% of Achidatex on June 18, 2001.
Achidatex is a leading manufacturer/producer of ballistic shields,
long term storage systems, liquid logistic products, combat flak
jackets, tents and other personal military and civilian protective
equipment and supplies.
o On August 23, 2002 we signed a Joint Venture Agreement with a
Brazilian investor for the formation of a subsidiary in Brazil which
will be called Export Erez Jenade Security Ltda. The subsidiary will
operate out of a 7,000 square foot facility located in Brazil that is
out by the joint venture partner. We anticipate that this subsidiary
will be operational by the fourth quarter of 2003.
2
As of December 31, 2002, the organizational structure of the Company is as
follows:
Defense Industries
International, Inc.
I
I
I
Export Erez USA, Inc.
I
I
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I I
I I
Export Erez Ltd. Achidatex
I Nazareth Elite Ltd.
I
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I I
I I
Dragonwear Trading Ltd. Mayotex Ltd.
PRODUCTS
We have four major product groupings:
o The first major product group is aimed at the international
military/defense market. Our military products include body armor,
bulletproof clothing and combat vests, bomb disposal suits, battle
pouch and combat harness units, flak jackets, dust protectors, padded
coats, sleeping bags, weapons straps and belts, dry storage units,
liquid logistics, ceramic ballistic plates, ballistic wall covering,
tents and vehicle covers. Products under development include ballistic
helmets, stab-resistant fabric, polyethylene ballistic plates and
one-way protective windows.
o The second product group is aimed at the civilian market, including
law enforcement, border patrol enforcement, prison forces, special
security forces, corporations, non-governmental organizations and
individuals worldwide. Our civilian market products include
adaptations of our military products, heavy-duty clothing and other
types of sporting and camping equipment and clothing including tents
and sleeping bags. This group includes the VIP luxury car armoring we
began producing in July of 2002.
o The third product group is aimed at the industrial market and includes
special industrial fabrics and cloth tapes.
o The fourth product group is aimed at animal owners, and includes dog
collars and leashes, items for horses and riders and protective
equipment.
3
The following table details our current product line, current and future
target markets and geographic areas.
Present Future
_____________________________________ _____________________________________
Product description Target market Geographical area Target market Geographical area
Dust protectors and various covers Military International Military, civilian International
Padded coats Military, civilian International Military, civilian International
Range of protective vests and Military, civilian International Military, civilian International
flak jackets
Cooling jackets Military International Military International
Range of overalls Military International Military, International
civilian,
industrial
Vests Military, civilian International Military, civilian International
Sleeping bags Military, civilian International Military, civilian International
Carriers for grenade launchers Military International Military International
Individual bags and totes Military International Military, civilian International
Tents Military, civilian International Military, civilian International
Camp beds Military, civilian International Military, civilian International
Collapsible storage containers Military, civilian International Military, civilian International
Evacuation stretchers Military, civilian International Military, civilian International
Personal belts and weapon straps Military International Military, International
industrial
Woven fabrics: canvas, corduroy, Military, International Military, International
nylon, aramid civilian, civilian,
industrial industrial
Ballistic wall covering Military, International Military, International
civilian, civilian,
industrial industrial
Ballistic Plates/Panels Military, civilian International Military, civilian International
Car armoring Civilian Domestic Military, civilian International
4
Present Future
_____________________________________ _____________________________________
Product description Target market Geographical area Target market Geographical area
Range of tapes Military, International Military, International
civilian, civilian,
industrial industrial
Bags for riders Civilian - animals International Civilian International
Horse blankets and saddles Civilian - animals International Civilian International
Collars, harnesses and leads Civilian - animals International Civilian International
Protective vests for riders Civilian - animals International Civilian International
Leg protectors Civilian - animals International Civilian International
Long term storage systems Military, International Military, International
industrial industrial
Car covering branch Civilian International Civilian International
We are currently developing new products for military and civilian markets,
including mine protective shoes, stab-resistant fabric, floatable ballistic
vest, ballistic protection based on ceramic glass, ballistic concrete
reinforcement and modified ballistic wall covering. We are also developing a new
generation of complex products for protective vests used by security forces and
armies all over the world. The vests will offer a very high level of protection
with minimum weight and maximum flexibility.
PRODUCT QUALITY
The Company has a reputation for creating and producing premium quality
products that represent the cutting-edge in design and technological
development. Through on going research and development efforts, the Company is
setting the standards for personal defense related products. Our manufacturing
facilities meet American EQNET and International ISO 9002; MIL.STD.105D;
MIL-I-45208A (FOR THE United States ARMED FORCES); AQAP (FOR THE German Armed
Forces and NATO); and the National Institute of Justice (N.I.J.) standards.
PRODUCTION
The Company develops, manufacturers and assembles its own products. The
Company's production facilities are located at a number of sites:
o Erez Industrial Zone
o Netivot
o Upper Nazareth
o Ashdod
5
What distinguishes us is vertical integration. Production begins when
thread is received from suppliers and ends at the level of the final item.
o The Company has the means and ability to carry out the following
activities independently: weaving, cutting, sewing, gluing, welding,
systems integration, assembly etc.
o If necessary and depending on the work load, the Company buys
production from sub-contractors, mainly at the raw material level and
with respect to some of the sewing work.
o There are processes that the Company buys from sub-contractors,
including: metal work, cloth coating work, dyeing and finishing,
digital printing.
o In addition, and according to need, the Company buys development
services from third party vendors.
Production is carried out within the following departments:
o Research and Development Department
o Technical Design Department
o Mechanics Processing Department
o Product Assembly Department
o Quality Control Department
TRANSPORTATION AND DISTRIBUTION
Our transportation and distribution varies according to the customer and
the product being shipped. The products supplied in the framework of export
deals are generally F.O.B. or C.I.F. terms. Consignments are sent by sea or air,
depending on the nature of the deal and/or the urgency of supply. Israel's
marine transportation routes, where our manufacturing plants are located, are
well-developed links with the world, so that there is no great logistic problem
of distribution, and in most cases the goods reach their destination within two
to three weeks, depending on the arrangements with the customers.
RAW MATERIALS
Our products include raw materials such as fabric purchased in Israel and
abroad, specialized composite materials such as Kevlar produced by Dupont Ltd.,
Twaron produced by Twaror Teijn Ltd., Dyneema produced by D.S.M. Ltd. and
Spectra and Gold Flex produced by Honeywell. Other specialized materials include
specialized glass mixed with polycarbonate and various resins.
6
Dupont's Kevlar(R) brand fiber was initially introduced in 1965 and was the
first material identified for use in the modern generation of concealable body
armor. Kevlar(R) is a man-made organic fiber, with a combination of properties
allowing for high strength, low weight, high chemical and flame resistant.
Through the years Dupont Kevlar(R) continues to develop and design new
generations of this high-performance fabric.
Spectra(R) fiber, manufactured by Honeywell, is an ultra-high-strength
polyethylene fiber and has one of the highest strength-to-weight ratios of any
man-made fiber. Honeywell uses its Spectra(R) fiber to make its patented Spectra
Shield(R). Additional aramid fibers that are used in the manufacture of body
armor are Goldflex(R), Twaron(R), Dyneema(R), and Zylon(R). These
state-of-the-art fibers are continuously being improved and advanced, which
increases the possibility of superior new products entering the market.
We use a mixture of aramid fibers forming a variety of ballistic materials
in a combination of non-woven unidirectional sheets. As a result, the company
believes its protective equipment is highly competitive and provides maximum
protection with minimum weight. Management has long-term relationships with some
of its suppliers and believes that these suppliers are stable and does not
anticipate any disruption in a steady supply of materials.
We obtain our supplies by purchasing on the basis of an open letter of
credit, by specialized documentary credit, or in the case of suppliers we have
dealt with for years, on open account. We believe that our suppliers are stable,
and we foresee no problems or disruption in a steady supply of materials. A
disruption to our supply of materials could have an adverse impact on our
operating results.
SEASONALITY
Sales of our military and security clothing products and industrial
products are not seasonal in nature. Sales of our camping equipment and clothing
may experience slight increases during certain seasons.
MARKETING AND SALES
Our sales and marketing strategies revolve principally around developing a
reputable brand identity and ongoing customer relationships, in addition to
continuously innovating and improving the quality of our products. Specifically,
our marketing strategy is designed to penetrate various markets by complying
with stringent quality standards instituted in targeted countries.
Below are some of the steps we take in order to penetrate different markets
with its next generation of products:
o Locate domestic entities to market our products.
o Initiate contacts with chambers of commerce in international
embassies.
o Actively participate in tenders and bids for contracts in military,
police and civilian markets worldwide. We are currently negotiating
for contract bids with the governments of Germany, Greece, Belgium,
Turkey, Chile, Paraguay, Mexico, Guatemala, India, Japan, and Brazil
and the United Nations.
7
o Actively participate in international exhibitions of military and
police security equipment. We have participated in exhibitions Milipol
in Paris and India.
o Advertise on the Internet.
o Advertise in professional publications.
o Appear in international databases, such as BDI (Kompass), various
"yellow page" directories, Dun & Bradstreet, and other directories.
o Distribute brochures describing procedures and product offerings.
Our marketing division is divided into the following sections:
o One section specializing in locating and submitting government bids.
o One section specializing in the civilian sector.
The export marketing division operations consists of a marketing manager
who operates on a self-employed basis and manages a team of employees. This
marketing team carries out market surveys, market segmentation, and seeks out
new markets for the products, and new engagements with the international
business community. The marketing team earns commissions that are determined in
advance, according to the scope and nature of the deal.
The civilian market is handled by two different offices located in Erez
Industrial Area and Nazareth Elite, each one deal with a different geographical
region and a different basket of products.
CUSTOMERS
We have customers throughout the world including in the United States of
America, Israel, and several other countries in the Mediterranean, Europe, Latin
America, South America, Africa and Asia. In 2002, we sold approximately 75% of
our products in Israel, with the balance sold internationally. The primary end
users of our products can be divided into four groups.
o MILITARY DEFENSE AND SECURITY FORCES. This group is in need of
personal military and protective equipment such as body armor, bomb
disposal suits, bullet proof vests and jackets, ballistic helmets and
plates, battle pouch and combat harness units, backpacks, dry storage
systems, liquid logistics systems, clothing, tents, vehicle covers and
sleeping bags. These types of equipment must meet developed "human
engineering" requirements, providing comfort as well as maximum
protection, preventing penetration by bullets and knives, protection
against fire, collisions and other hazards.
8
o CIVILIAN DEFENSE CUSTOMERS. This group includes members of civilian
security forces such as law enforcement, private security firms,
airport security, personal bodyguards, and event security guards. The
requirements of these customers for protective equipment are similar
to those of military defense and security forces. However, since their
work is mainly in a civilian environment, there is a greater need to
pay attention to the esthetic appearance of these products, with
protective features made as unobtrusive as possible.
o CIVILIAN CUSTOMERS. This group includes campers and hikers of all ages
who need equipment such as sleeping bags, tents, backpacks, and
clothing adapted for specific needs such as mountain climbing, hiking
and camping in all types of climates. This customer group also
includes those civilians in need of automobile covers for cars,
trucks, buses and other large vehicles.
o ANIMAL SPORTS FANS AND ANIMAL OWNERS. This category divides into two
subgroups of: individual pet owners, for whom animal accessories are
supplied at three price levels and qualities and animal sport groups
who buy equipment for specific animal sports. In the case of horse
riding equipment, "human engineering" is very important to ensure
maximum comfort for the animal and the rider.
Due to the sensitive nature of our business and the products we supply,
specifically the products supplied to military defense and security forces, we
are often required to sign non-disclosure agreements with our customers which
preclude us from specifically identifying them in this report. Our three largest
customers accounted for approximately 60% of our total sales for the year ended
December 31, 2002.
BACKLOG
At December 31, 2002, we had unfilled customer orders of approximately $3.5
million. This backlog is due to the Intifada that broke out in September 2000 in
which the Arab population, both in the areas held by Israel and in the areas of
the Palestinian Autonomy, rose up against Israel. The uprising led to an
economic downturn in the economy and heavier than expected current security
expenditures.
Over the past year the Ministry of Defense has reduced its orders from all
Israeli companies, including companies in Defense Industries. During the last
quarter of 2002 purchase orders intended for the purchase of equipment from the
Company were placed on hold. At the beginning of the first quarter of 2003, $1.2
million of the orders placed on hold in the last quarter of 2002 were released.
However, in view of the installation of a new government in February 2003, all
remaining orders have been placed on hold until a new economic plan is in place.
STRATEGIC BUSINESS PARTNERS
In October 2002, we signed a licensee agreement for a period of three years
with Smith & Wesson Holding Corporation that enables us to use the Smith &
Wesson trademark on several of our bullet-proof vests. The Company believes that
the Smith & Wesson brand name will be extremely helpful for introducing its
protective products into the American market, and particularly to the market
segment known as Law Enforcement, and another segment of the private market. The
Law Enforcement segment includes all police units in the various states and
counties of the US, and represents a potential of tens of thousands of units
each year. The private market segment refers primarily to "fast response" units
such as fire brigades and the Red Cross, of which there are about 180,000 of
various types.
9
In December 2002, we signed a one year distribution agreement with Freedom
Medical, a Pennsylvania corporation, for the distribution of its products in the
United States market on a nonexclusive basis. We are in the process of
determining which products will be distributed under the agreement. We
anticipate that the final details of this agreement will be made within the
second quarter of 2002.
REGULATION
Our operations are subject to extensive regulation by the United States and
Israeli authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of our operations.
The National Institute of Justice (NIJ) has established worldwide standards
for "Ballistic Resistance of Personal Body Armor". The NIJ issues performance
standards that clearly specify a minimum performance level for each attribute
that is critical to the equipment's intended use. This coveted compliance
standard has gained global acceptance as a benchmark to evaluate the
effectiveness of a given body armor model. The NIJ body armor-testing program
relies on voluntary participation by manufacturers. However, many police
departments require that armor be tested and found in compliance with NIJ
standards before they purchase the armor. Defense Industries through Export Erez
and Achidatex Nazareth Elite have numerous products that have been tested and
found to comply with NIJ Standard 0101.03 and 0101.04.
Our manufacturing practices have obtained ISO 9002 certification. This
international certification harmonizes and establishes minimum standards for
quality manufacturing throughout the world. Through the years, ISO standards
have expanded beyond the quality system and now confirm conformity into
environmental issues, safety and occupational health. This voluntary
certification process is designed to provide consistency in the manufacturing
process and quality control. Other quality control standards pertaining to our
manufacturing facilities consist of the following:
1) MIL.STD: 105D, MIL-I-45208A (for the United States Armed Forces)
2) AQAP: (for the German Armed Forces and NATO)
In 2001, we sent proprietary ballistic ceramic boards to Germany for
laboratory testing. As a result of these tests, the products were deemed to have
met the German qualification standard. Obtaining this standard allows us to sell
these products throughout the German and European markets.
10
The following are among the rules and procedures all companies must follow
in order to participate in the Ministry of Defense and other government bids in
Israel:
o The bidder must be registered as a recognized supplier. The bidder
must have government certification and is authorized to participate in
bids only up to the limit of its approved security classification.
National Priority Area and local product: goods produced in Israel are
given priority over foreign bidders according to Israeli bid
regulations. The bidder must offer an attractive price. The bidder
must keep to contractual schedules and milestones. The goods must pass
final quality control tests before delivery.
o Every bid is different, and different documents may be required. There
are no special taxes on bids apart from the Israeli value added tax.
o Because our business is highly regulated, the laws, rules and
regulations applicable to our business are subject to regular
modification and change and future laws, rules or regulations may be
adopted which could make compliance much more difficult or expensive
or otherwise adversely affect our business or prospective business.
RESEARCH AND DEVELOPMENT
We are currently developing new products for military and civilian markets,
including mine protective shoes, stab-resistant fabric, floatable ballistic
vests, ballistic protection based on ceramic glass, ballistic concrete
reinforcement and modified ballistic wall coverings. We are also developing a
new generation of products for protective vests used by security forces and
armies. The vests provide greater production with minimum weight and maximum
flexibility.
The cost of research and development, all of which has been charged to
operations, amounted to approximately $300,000 over the last three years.
In the year 2003 and 2004, we anticipate increasing our research and
development of stab-resistant fabric, mine protective shoes, floatable ballistic
vests, ballistic protection based on ceramic glass, ballistic concrete
reinforcement, modified ballistic wall coverings and one-way protective windows.
We estimate total research and development expenses for 2003 and 2004 at
approximately $350,000 and $750,000, respectively. We plan to finance our future
research and development through an equity offering. If we are not successful in
securing enough funds through an equity offering, we will fund our research and
development with our working capital, however, the timing of our development
will be slowed.
STRATEGY
Our strategy is to capitalize on our significant research and development
capabilities and the strength of our brand identity and achieve greater
economies of scale. With the increase in international tensions, we believe the
demand for our products will continue to grow. We expect to address this growth
by offering a comprehensive array of high quality branded security products to
meet the needs of our customers around the world. We intend to enhance our
leadership position through additional strategic acquisitions by creating a
broad portfolio of products and services to satisfy all of our customers'
increasingly complex security products needs. The following elements define our
growth strategy.
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o CAPITALIZE ON EXPOSURE TO MILITARY PROBLEMS. We believe the events of
September 11, 2001, the subsequent "War on Terrorism", the increasing
likelihood of military conflicts abroad, and recent actual events in
saving lives through the performance of armor systems, are all likely
to result in additional interest in our products.
o EXPAND DISTRIBUTION AND NETWORKS AND PRODUCT OFFERINGS. We expect to
continue to leverage our distribution network by expanding our range
of branded law enforcement equipment through the acquisition of niche
defensive security products manufacturers, and by investing in the
development of new and enhanced products which complement our existing
offerings. A broader product line will strengthen our relationships
with distributors and enhance our brand appeal with military, law
enforcement and other end users.
o PURSUE STRATEGIC ACQUISITIONS. We selectively pursue strategic
acquisitions that complement and/or expand our product offerings,
provide access to new geographic markets, and provide additional
distribution channels and new customer relations.
COMPETITION
The ballistic-resistant and body armor industry is highly competitive and
fragmented throughout the world. In the U.S. a great majority of manufacturers
are privately held companies ranging from small limited product companies to
large multinational corporations. Defense Industry's management estimates that
there are approximately twenty United States companies that compete in the body
armor industry. The principal elements of competition are performance, price,
innovative design, and quality. Name recognition and reputation are highly
important in each country where products are sold. Our products are highly
competitive and well regarded, evidenced by the ability to sell to customers
such as the United States Military, Israeli Defense Forces, NATO and many
foreign governments. Barriers to entry for new companies entering the body armor
industry are low creating fierce competition and increasing the risk of new
companies entering this market. However, name and product reputations take many
years to develop, which significantly enhances the industry's long-standing
manufacturers. In the United States civilian market, (law enforcement, border
patrol forces, prison forces, and specialty forces) our products are less well
known. The Company intends to use its highly regarded international reputation
and the acquisition of United States companies to expand its United States
market.
Industry statistics are difficult to quantify however, we believe that the
number of active police officers has increased significantly over the past
years. In 2002 there were approximately 900,000 law enforcement personnel and
over 20,000 law enforcement agencies in the United States. It is reasonable to
expect this number will continue to increase as a partial response to the
September 11, 2001 terrorist attacks. As a result of these attacks, the United
States government has created the Office of Homeland Security; and although this
office's mandate is still being finalized, a homeland security infrastructure
will be developed. At the very least, the United States government has
identified homeland security issues as a potential long-term issue.
12
Our proprietary products such as dry storage units, ballistic wall
coverings, liquid pillow storage, and additional non-disclosed technology
address large markets with significantly less competition than the traditional
body armor product line.
Also, a rising prison population has increased the demand for law
enforcement security products. In a prison environment an additional feature for
protective equipment is the need to be stab resistant. Companies must provide
competitively priced and highly flexible protective equipment to compete in this
arena.
Our share of the Israeli defense market for applicable products in 2002 was
approximately 45% of a total market of $10,000,000. We have one major competitor
in this market: Rabintex with approximately 20% of the market. Our share of the
Israeli civilian market for applicable products in 2002 was approximately 9% of
a total market of $25,000,000, with 41% controlled by other Israeli companies
and 50% made up by imported goods. Internationally, our competitors in the
defense market include companies such as Point Blank, Safari Land of Ontario,
California and A.B.A. in the United States, L.B.A. in England, Indigo in Spain,
Systema Compositi in Italy, Hellenic Arms Industries in Greece and Barman in
Sweden. In each case, the competing manufacturers specialize in a more limited
product line than does Defense Industries.
In the civilian market, we are aware of approximately 20 companies
manufacturing similar products. A number of major manufacturers with resources
and reputations larger than those of Defense Industries compete for the same
market. We intend to market its products over the Internet as well as through a
network of distributors.
PATENTS AND TRADEMARKS
We hold several patents from various countries for our ballistic wall
coverings, dry storage systems and mine protective shoes. Our subsidiary
Achidatex holds several of our patents.
EMPLOYEES
As of March 13, 2003, we had 140 full-time employees. All employees are
primarily based in Israel. We believe our relationship with our employees is
good. Our employees are not represented by a collective bargaining organization
and we have not experienced a work stoppage.
CONDITIONS IN ISRAEL
GENERAL
Our principal operations facilities are located in Israel, and our
directors, executive officers and other key employees are also located primarily
in Israel. If we fail to overcome the challenges encountered in our
international operations, we could experience slower than expected revenue
growth and our business could be harmed. Some of the challenges include:
13
o reduced protection of intellectual property rights in some countries;
o licenses, tariffs and other trade barriers;
o longer sales and payment cycles;
o greater difficulties in collecting accounts receivable;
o seasonal reductions in business activity;
o potentially adverse tax consequences;
o laws and business practices favoring local competition;
o costs and difficulties of customizing products for foreign countries;
o compliance with a wide variety of complex foreign laws and treaties;
o political and economic instability; and
o variance and unexpected changes in local laws and regulations.
POLITICAL ENVIRONMENT
Since the establishment of the State of Israel in 1948, a state of
hostility has existed, varying in degree and intensity, between Israel and the
Arab countries. In addition, Israel and companies doing business with Israel
have been the subject of an economic boycott by the Arab countries since
Israel's establishment. Furthermore, following the Six-Day War in 1967, Israel
commenced administering the territories of the West Bank and the Gaza Strip and,
since December 1987, increased civil unrest has existed in these territories.
Although, as described below, Israel has entered into various agreements with
Arab countries and the Palestine Liberation Organization ("PLO") and various
declarations have been signed in connection with efforts to resolve some of the
above-mentioned problems, no prediction can be made whether a full resolution of
these problems will be achieved or regarding the nature of any such resolution.
To date, these problems have not had a material adverse impact on our financial
condition or results of operations, although there can be no assurance that
continuation of these problems will not have such an impact in the future.
In 1979, a peace agreement between Israel and Egypt was signed under which
full political relations were established; however, economic relations have been
very limited. In September 1993, a joint Israeli-Palestinian Declaration of
Principles (the "September 1993 Declaration") was signed by Israel and the PLO
in Washington, D.C., outlining interim Palestinian self-government arrangements.
Prior to the signing of that declaration, PLO Chairman Arafat sent a letter to
Israeli Prime Minister Rabin in which the PLO recognized Israel's right to exist
in peace and security, renounced terrorism and violence, and affirmed that the
clauses of the PLO Covenant denying Israel's right to exist are no longer valid.
In reply, Israel recognized the PLO as the representative of the Palestinian
people in the peace negotiations. In May 1994, Israel and the PLO signed an
agreement in Cairo in which the principles of the September 1993 Declaration
were implemented. In accordance with this agreement, Israel has transferred the
civil administration of the Gaza Strip and Jericho to the Palestinian Authority
and the Israeli army has withdrawn from these areas. In September 1995, Israel
and the PLO signed an additional agreement regarding the withdrawal by the
Israel Defense Forces from the heavily Palestinian populated areas and the
transfer of the Civil Administration to the Palestinian Authority in other areas
in the West Bank.
14
In July 1994, the Israeli Prime Minister and the King of Jordan signed a
joint declaration as the first step towards a peace treaty between Israel and
Jordan. The declaration provides for the cessation of belligerency between the
states, the mutual opening of airspace to civil aviation, the opening of border
crossings (the first of which was opened on August 8, 1994) and the commencement
of joint projects with respect to electricity and water resources. On October
26, 1994, Israel and Jordan signed a peace treaty, under which full political
and economic relations were formally established.
Although Israel has entered into agreements with certain Arab countries and
the PLO, and declarations have been signed to resolve some of the economic and
political problems in the Middle East, no prediction can be made whether a full
resolution of these problems will be achieved or regarding the nature of any
such resolution. To date, Israel has not entered into a peace treaty with either
Lebanon or Syria.
ARMY SERVICE
All male adult permanent residents of Israel under the age of 54 are,
unless exempt, obligated to perform military service duty annually.
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. Some of the employees of the Company are
currently obligated to perform annual reserve duty. While Mentortech has
operated effectively under these and similar requirements in the past, no
assessment can be made of the full impact of such requirements on the Company in
the future, particularly if emergency circumstances occur.
ITEM 2. DESCRIPTION OF PROPERTIES.
Our executive offices, manufacturing, production and distribution
facilities encompass three buildings in the Erez Industrial Area. One building,
owned by Joseph Postbinder, an officer of the Company, is leased to the Company
for $7,119 per month for 2,500 square meters. The second building is owned
directly by a subsidiary of the Company and is not unencumbered by any mortgage
or debt, and contains 1,400 square meters of usable space. The third building is
leased for $1,600 per month for 400 square meters. We also have a factory in the
Netivot Industrial Area, which is leased for $800 per month for 380 square
meters. The leases for these facilities expire December 31, 2004. The lease with
the affiliated party is not on terms at least as favorable as those that would
be obtained by an unaffiliated party.
Achidatex leases a 6,000 square meters building which is located in
Industrial Area of Nazeret for $15,000 per month from an affiliated party, and a
300 square meters executive offices located in Petah-Tikva for $1,800 per month.
The leases on these facilities expire in 2004 and 2005, respectively.
15
Mayotex leases a 230 square meters building which is located in Industrial
Area of Ashdod for $1,000 per month. The lease on this facility expires December
31, 2003.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending or to the best of our knowledge, any
threatened legal proceedings. No director, officer or affiliate of the Company,
or owner of record of more than five percent (5%) of the securities of the
Company, or any associate of any such director, officer or security holder is a
party adverse to us or has a material interest adverse to us in reference to
pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year there were no matters
submitted to the shareholders for approval.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET PRICES OF COMMON STOCK
Our common stock is traded on the Over-The-Counter Bulletin Board under the
symbol "DFNS.OB". The high and low bid intra-day prices of the common stock were
not reported on the OTCBB for the time periods indicated on the table below.
Accordingly, the table below contains the high and low bid closing prices of the
common stock as reported on the OTCBB for the time periods indicated.
PRICE RANGE
-----------
HIGH LOW
---- ---
FISCAL YEAR ENDED DECEMBER 31, 2002
. First Quarter $1.35 $0.125
Second Quarter 2.89 1.53
Third Quarter 2.80 1.20
Fourth Quarter 1.25 0.38
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter $0.12 $0.15
Second Quarter 0.12 0.03
Third Quarter 0.16 0.09
Fourth Quarter 0.37 0.15
(B) SHAREHOLDERS
Our common shares are issued in registered form. OTC stock transfer in Utah
is the registrar and transfer agent for our common stock. As of March 15, 2003,
there were 25,550,000 shares of our common stock outstanding and we had
approximately 74 shareholders of record.
16
(C) DIVIDENDS
We have never declared or paid any cash dividends on our common stock and
we do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and
the expansion of our business. Any future determination to pay cash dividends
will be at the discretion of the board of directors and will be based upon our
financial condition, operating results, capital requirements, plans for
expansion, restrictions imposed by any financing arrangements and any other
factors that the board of directors deems relevant.
(D) PENNY STOCK
Until the Company's shares qualify for inclusion in the NASDAQ system, the
public trading, if any, of the Company's common stock will be on the OTC
Bulletin Board. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the common stock
offered. The Company's common stock is subject to provisions of Section 15(g)
and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), commonly referred to as the "penny stock rule." Section 15(g) sets forth
certain requirements for transactions in penny stocks, and Rule 15g-9(d)
incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the
Exchange Act. The SEC generally defines "penny stock" to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If the Company's common stock is deemed to be a penny stock, trading
in the shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors. "Accredited investors" are persons with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse. For transactions covered by these rules, broker-dealers must
make a special suitability determination for the purchase of such security and
must have the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document, prepared by the SEC, relating to the penny stock
market. A broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information on the
limited market in penny stocks. Consequently, these rules may restrict the
ability of a broker-dealer to trade and/or maintain a market in the Company's
common stock and may affect the ability of the Company's shareholders to sell
their shares.
(E) SALES OF UNREGISTERED SECURITIES
On April 8, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company issued 100,000 shares of common stock in return
for future consulting services. The 100,000 shares were valued at $172,000, the
fair market value of the common stock on the grant date based on the prevailing
market price. Consulting expense of $129,000 was recognized during 2002 and
$43,000 is reflected as a deferred consulting expense component of equity.
17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain
significant factors which have affected our financial position and operating
results during the periods included in the accompanying consolidated financial
statements, as well as information relating to the plans of our current
management.
OVERVIEW
Our strategic objective is to become a leading global provider of personal
military and civilian protective equipment and supplies. We intend to realize
this objective through the following:
o Pursue Strategic Acquisitions: We intend to selectively pursue
acquisitions that enhance our product lines and geographic presence in
an effort to consolidate the highly fragmented industry in which we
operate.
o Focus on New Product Development: We are working towards increasing
our product offering thereby placing it in a position to offer an even
more comprehensive portfolio of products to satisfy all of our
customers' protective equipment needs.
o Capitalize on Increased Demand for Our Products: As a result of the
terrorist attacks on September 11, 2001, an increased emphasis on
safety and protection now exists worldwide. This has translated into
increased spending on personal military and civilian protective
equipment and supplies. We expect a continued increase in volume for
our current major government programs and we expect to participate in
other existing and future government programs that require our
products. We also expect a continued increase in sales to the growing
civilian market for our products.
o Expand Marketing Efforts: In the wake of the terrorist attacks of
September 11, 2001, a greater global recognition regarding the need
for our products has materialized. We intend to capitalize on this
increased interest in our products by broadening our marketing efforts
in an attempt to create a better global awareness of our products.
o Expand Distribution Network: We intend to broaden our distribution
networks through strategic acquisitions and the development of new
products.
RESULTS AND PLAN OF OPERATIONS
During 1999, bulletproof vests developed by Defense were sent to
laboratories in the United States for testing, and following the tests, the
products were deemed to have met the American NIJ standard. Obtaining this
standard has enabled Defense to enter the American market with its products, and
to encourage development of other markets.
18
During 2001, ballistic ceramic boards developed by Defense were sent to
laboratories in Germany for testing, and following the tests, the products were
deemed to have met the German qualification standard. Obtaining this standard
has enabled Defense to enter the German and European markets with these
products.
During 2002, Defense enlarged its Internet web site in order to participate
in the worldwide trend towards more electronic trade. Our web site address is
www.defenseindustries.net. In July of 2002, Defense began providing VIP luxury
car armoring. This new operation fills a gap that exists in the Israeli market.
Defense intends to further develop the following products between 2003 and
2004: anti-stab cloth, ballistic helmets, ballistic ceramic and polyethylene
plates, one-way protective windows, aramid fabrics, dry storage, ballistics, NBC
suits, NBC tents, and mine protective shoes. Expanding its product range
requires Defense to make considerable investments in research and development,
and penetrating markets outside Israel also requires a large capital investment.
THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
SALES AND GROSS PROFIT MARGIN
Net revenues in the year ended December 31, 2002 increased to $10,629,600
compared to $8,941,013 for the same period in 2001 that reflects an increase of
approximately 19%. Net sales to the local market in the year ended December 31,
2002 increased moderately to $8,036,633 or 5.6% from $7,611,893 for the year
ended December 31, 2001. We attribute this moderate increase in net sales to the
local market to a temporary reorganization of the local Defense Ministry which
resulted in a delay in certain orders being made by the Israeli Defense Ministry
during the second half of 2002 and the elimination of certain unprofitable
operations that were acquired in connection with its acquisition of Achidatex.
Export net sales in the year ended December 31, 2002 increased to $2,592,967 or
95% from $1,329,120 for the year ended December 31, 2001. We attribute the
increase in export net sales to our increased marketing efforts, which create a
better global brand and worldwide recognition awareness of our products. Net
sales for the year ended December 31, 2001 include revenues attributable to the
operations of Achidatex from June 18, 2001 (the effective date of the
acquisition of Achidatex) to December 31, 2001, while net sales for the year
ended December 31, 2002 include revenues attributable to the operations of
Achidatex from January 1, 2002 to December 31, 2002. The breakdown of net sales
for the year ended December 31, 2002 is as follows:
SEGMENTED INFORMATION
SALES
$2002 $2001
Local market-civilian 3,117,066 2,652,696
Local market-military 4,919,567 4,959,197
Export market-military 2,592,967 1,329,120
--------- ---------
Total 10,629,600 8,941,013
========== =========
INCOME FROM OPERATION
$2002 $2001
Local market-civilian 433,628 340,078
Local market-military 559,295 591,411
Export market-military 226,365 176,920
------- -------
Totals $1,219,288 $1,108,409
========== ==========
19
Gross profit for the year ended December 31, 2002 increased to $3,838,620
or 42% from $2,710,039 for the year ended December 31, 2001. This increase in
gross profit is explained partly by the acquisition of Achidatex and increased
demand for our products. The gross margin for the one year ended December 31,
2002 improved to 36.1% as compared to 30.3% for the year ended December 31,
2001.
The cost of production in the year ended December 31, 2002 was $6,790,980
compared to $6,230,974 for the year ended December 31, 2001. This change in cost
of production is explained by the acquisition of Achidatex.
Selling expenses for 2002 were $663,605, as compared to $341,536 in 2001.
The increase in the selling expenses is explained by the increase in export
sales and the commission paid to various sales promoters.
General and administrative costs for the year ended December 31, 2002
increased to $1,955,727 from $1,260,094 for the year ended December 31, 2001.
This increase is explained partially by the acquisition of Achidatex and
$724,000 in expenses to various consultants and public relations firms. Of the
$724,000, $178,000 is a cash payment and $546,000 is paid through the issuance
of 370,000 shares of our common stock. The value of the shares issued was
determined by the closing bid price of our common stock on the date the
consulting agreement was signed.
Financial expense, net for the year ended December 31, 2002 was $148,852
compared to $154,117 for the year ended December 31, 2001.
INCOME TAX EXPENSES
Income tax expense for the year ended December 31, 2002 decreased $20,751
or 6% from $333,789 for the year ended December 31, 2001. The effective income
tax expense was 38% and 33% for the years ended December 31, 2002 and 2001,
respectively. The increase in the effective income tax rate was due to no tax
benefit recognized in 2002 for the impairment loss on marketable securities and
the expiration of net operating loss carryforwards in 2002, offset by a deferred
tax benefit recorded in 2002 for net operating loss carryforward.
CASH FLOW
20
In 2002, net cash provided by operating activities was $1,730,566, as
compared to $923,836 in 2001. This increase by 87.3% is due to increased
production efficiency and growth in sales.
In 2002, net cash provided by (used in) investing activities was
($628,210), as compared to ($478,576) in 2001.
In 2002, net cash (used in) provided by financing activities was
($985,315), as compared to ($259,320) in 2001. The company dedicated part of its
funds derived from its current activity to repay long and short terms loans.
Cash and cash equivalents at December 31, 2002 were $831,820, as compared to
cash and cash equivalents at December 31, 2002 of $781,996.
OPEN ORDERS
At December 31, 2002, we had unfilled customer orders of approximately $3.5
million. This backlog is due to the Intifada that broke out in September 2000 in
which the Arab population, both in the areas held by Israel and in the areas of
the Palestinian Autonomy, rose up against Israel. The uprising led to an
economic downturn in the economy and heavier than expected current security
expenditures.
Over the past year the Ministry of Defense has reduced its orders from all
Israeli companies, including companies in Defense Industries. During the last
quarter of 2002 purchase orders intended for the purchase of equipment from the
Company were placed on hold. At the beginning of the first quarter of 2003, $1.2
million of the orders placed on hold in the last quarter of 2002 were released.
However, in view of the installation of a new government in February 2003, all
remaining orders have been placed on hold until a new economic plan is in place.
LIQUIDITY AND CAPITAL RESOURCES
Our current activities are financed by short and long term bank loans
balanced by short term deposits. The decision regarding the amount of the short
term loans was derived from considerations of the yield on the deposit which is
generally in foreign currency (receipts from overseas sales), compared to the
cost of short term loans. Long term loans derived from acquisition of Achidatex
that are amortized over a five year period were $698,442 at December 31, 2002.
We believe that we have sufficient working capital to sustain our current level
of operations for the next year.
In the years 2003 and 2004, Defense anticipates increasing its research and
development of certain items, primarily, stab-resistant fabric, mine protective
shoes, floatable ballistic vests, ballistic protection based on ceramic glass,
ballistic concrete reinforcement, modified ballistic wall coverings and one-way
protective windows.
Defense anticipates total research and development expenses for 2003 and
2004 at approximately $350,000 and $750,000, respectively. Defense anticipates
that in the year 2005 research and development expenses would rise to
approximately $1,250,000.
21
The development of these products will be by staff engineers. Defense
anticipates that these products will be approximately 20% in production in the
year 2003, increasing to full production by the year 2006.
Defense anticipates that in order to fund the research and development for
these products, it may effect an offering of its equity securities. On October
24, 2002, the Company entered into a consulting agreement with KPMG Corporate
Finance, LLC ("KPMG") whereby KPMG shall act as the Company's exclusive
financial advisor and private placement agent. KPMG is entitled to an engagement
fee of $25,000 upon execution of the agreement and an additional $25,000 for a
retainer fee upon completion of the Memorandum to be used in any private
placement. KPMG will attempt to raise up to $10,000,000 in a private placement
of the Company's securities in return for a success fee of 7.0% of the proceeds
raised. KPMG will assist the Company in identifying possible acquisitions
including and up to final negotiations in return for (1) 75% of KPMG's normal
hourly fees and (2) 2.0% of the aggregate consideration paid by the Company
including any liabilities assumed.
If Defense is unable to effect an offering of its securities, it may fund
its research and development through its operating funds. In such event, the
timing of its anticipated research and development and subsequent production
schedule would be slowed.
In conjunction with the acquisition of 76% of the outstanding common stock
of Achidatex Ltd. effective June 18, 2001, the Company recorded long-term
deferred tax asset aggregating $666,000 relating to the expected utilization of
the net operating loss ("NOL") carryforwards of Achidatex Ltd aggregating
approximately $1,851,000. As of December 31, 2002 and December 31, 2001
remaining deferred tax assets with respect to Achidatex`s Nol carryforward were
approximately $0 and $362,000, respectively.
As a result of Achidatex Ltd. operating profitably since its acquisition by
the Company in June 2001, the Company has recognized a reduction in its reported
income of $258,998 and $107,481 for the year ended December 31, 2002 and 2001,
respectively, to account for the 24% minority interest liability. Respectively,
as a result of the utilization of the NOL carryforwards of Achidatex Ltd., cash
expended for income taxes was reduced. The Company has access to the cash
generated by Achidatex Ltd.
Carryforwards of Achidatex Ltd. were fully-exhausted by December 2002.
Accordingly, subsequent to this date, the Company expects that the reduction in
its reported income to account for the minority interest allocation will
decrease, as will the Company's consolidated cash flows, reflecting the absence
of a NOL carryforward to reduce cash expended for income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
No. 13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS 145 related to classification of debt
extinguishments are effective for fiscal years beginning after May 15, 2002.
Earlier application is encouraged.
22
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Under SFAS 146, the
Company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. SFAS
146 will require the Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an
amendment of FASB Statement No. 123." SFAS 148 amends FASB Statement No. 123,
"Accounting for Stock Based Compensation" and provides alternative methods for
accounting for a change by registrants to the fair value method of accounting
for stock-based compensation. Additionally, SFAS 148 amends the disclosure
requirements of SFAS 123 to require disclosure in the significant accounting
policy footnote of both annual and interim financial statements of the method of
accounting for stock based-compensation and the related pro forma disclosures
when the intrinsic value method continues to be used. The statement is effective
for fiscal years beginning after December 15, 2002, and disclosures are
effective for the first fiscal quarter beginning after December 15, 2002.
The adoption of these pronouncements will not have a material effect on the
Company's consolidated financial position or results of operations.
ITEM 7. FINANCIAL STATEMENTS.
(A) FINANCIAL STATEMENTS
The following financial statements are set forth at the end hereof.
1. Report of Independent Auditors
2. Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001.
3. Consolidated Statements of Operations for the years ended December 31, 2002
and December 31, 2001.
23
4. Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2002 and 2001.
5. Consolidated Statements of Cash Flows for the years ended December 31, 2002
and December 31, 2001.
6. Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective, May 3, 2002, the Company dismissed Smith & Company ("S&C"), as
the Company's independent accountants. Effective May 15,2002, the Company
engaged Weinberg & Company, P.A. ("W&C") as the Company's new independent
accountants. The Company's Board of Directors approved the dismissal of S&C and
the engagement of W&C.
Prior to the engagement of W&C, neither the Company nor anyone on its
behalf consulted with such firm regarding the application of accounting
principals to a specified transaction, either completed or uncompleted, or type
of audit opinion that might be rendered on the Company's financial statements.
S&C audited the Company's financial statements for the period from
inception July 9, 1997 to December 31, 2001. S&C's report for this period did
not contain an adverse opinion or a disclaimer of opinion, nor was the report
qualified or modified as to uncertainty, audit scope or accounting principles.
During the period from July 9, 1997 to May 13, 2002, there were no
disagreements with S&C on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of S&C, would have caused
such firm to make reference to the subject matter of the disagreements in
connection with its report on the Company's financial statements. In addition,
there were no such events as described under Item 304(a)(1)(IV)(B) of Regulation
S-B during the period from July 9, 1997 to May 13, 2002.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table and text sets forth the names and ages of all our
directors and executive officers and the key management personnel as of December
31, 2002. Our Board of Directors is comprised of only one class. All of the
directors will serve until the next annual meeting of stockholders and until
their successors are elected and qualified, or until their earlier death,
retirement, resignation or removal. Executive officers serve at the discretion
of the Board of Directors, and are appointed to serve until the first Board of
Directors meeting following the annual meeting of stockholders. Also provided is
a brief description of the business experience of each director and executive
officer and the key management personnel during the past five years and an
indication of directorships held by each director in other companies subject to
the reporting requirements under the Federal securities laws.
24
NAME AGE POSITION HELD
Joseph Postbinder 56 Chairman and CEO
Baruch Tosh 47 President
Meira Postbinder 57 Vice President of Financing, Secretary, Treasurer and
Director
Dan Zarchin 55 Vice President of Marketing and International,
Business Development and Director
Tsippy Moldovan 46 Deputy Managing Director of Finance and Director
Avraham Hatzor 58 COO and Director
Peter Zoltan 55 Deputy-Chairman & US Operations Manager
Motti Hassan 52 Director
JOSEPH POSTBINDER, Chairman of the Board, and Chief Executive Officer of
Defense and its subsidiaries, has a technical background in fine mechanics. He
has been in charge of Export Erez and Mayotex since he founded the companies. He
is the husband of Meira Postbinder, our Vice President of Financing, Secretary
and Treasurer.
BARUCH TOSH, is the President of Defense. On January 1, 2003 Mr. Baruch
Tosh, joined the Company and was appointed as the President on March 1, 2003.
For the past five years Mr. Tosh served as the Business Development Manager for
FMS Enterprises Ltd., Israel. FMS produces woven aramid fabrics, unidirectional
shields and plates/panels for ballistic protection. Mr. Tosh received a Bachelor
of Science degree in Mechanical Engineering from the Ben Gurion University,
Beer-Sheva, Israel in 1978 and a Diploma of Business Administration from
Technion, Haifa, Israel, in 1996.
MEIRA POSTBINDER, manages the financing division of Defense and is a
director of Export Erez Ltd. which positions she has held for more than the last
six years. She is the wife of Joseph Postbinder, our chairman and CEO.
DAN ZARCHIN, Manager of Marketing and International Business Development
and a director of Defense, is a textile engineer. He is also a consultant to
Defense and has been doing business as Zarchin Consultants, Tel-Aviv, Israel,
since 1981. Previously, he was the Marketing Manager for Kibbutz Noam-Urim,
Israel. Mr. Zarchin received a Bachelor of Arts degree in Textile Engineering
from the College of Textile Science in Philadelphia, Pennsylvania 1973 and a
Masters of Business Administration from Tel-Aviv University, Tel-Aviv, Israel,
in 1979.
TSIPPY MOLDOVAN, is the Deputy Managing Director of Finance and a director
for Defense and has been the Deputy Managing Director of Finance of Export Erez
for the past 13 years. Mrs. Moldovan attended Buchnich Accounting School in
Ashkelon, Israel, and completed course work in economics and management
accounting from the Mishlav School, Tel Aviv, Israel.
25
AVRAHAM HATZOR, is the COO of Defense and for the past 24 years served as
one of the managers of Achidatex. Mr. Hatzor has served as the managing director
of Achidatex for the past nine years. Mr. Hatzor studied electronics at a
technical high school and served for seven years in the IDF including a period
as a civilian advisor.
PETER ZOLTAN, director of Defense, is also the director of US Operations
for Defense. He is the president, and chairman of the board of Jovanda Ltd. He
is a 1974 graduate of Pepperdine University in California. For the past
twenty-five years, he has been a principal in or an executive with several
entrepreneurial ventures in the United States and abroad. In 1992 Peter founded
a cutting-edge energy conservation company, which was later taken public, then
merged with a major company in the agricultural sector.
MOTI HASSAN, director of Defense, is an Electronics engineer. Mr. Hassan
received a Bachelor of Science degree in Electronic Engineering from the Ben
Gurion University, Beer Sheve Israel in 1976. Mr. Hassan served in the Israeli
army as a system engineer until 2000 when he retired from the army and joined a
private company in the field of professional video as a sales and business
development manager.
(A) COMPENSATION AND OTHER MATTERS
For the period ended December 31, 2002, certain corporate actions were
conducted by unanimous written consent of the Board of Directors.
Directors receive no compensation for serving on the Board of Directors,
but are reimbursed for any out-of-pocket expenses, if any, incurred in attending
board meetings.
(B) EMPLOYMENT AGREEMENTS
We have an employment agreement with Mr. Baruch Tosh effective January 1,
2003. Mr.Tosh will receive additional compensation of 1.5% of the growth in
total sales. Mr. Tosh, at his option, may receive shares of common stock in lieu
of cash. Effective March 1, 2003 Mr. Tosh will serve as president of the
Company.
(C) FAMILY RELATIONSHIPS
Joseph Postbinder and Meira Postbinder are husband and wife.
(D) INVOLVEMENT IN LEGAL PROCEEDINGS
To the best of the Company's knowledge, during the past five years, none of
the following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
26
(E) SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers and directors and persons who own more than 10% of a
registered class of our equity securities to file with the Securities and
Exchange Commission initial statements of beneficial ownership, reports of
changes in ownership and annual reports concerning their ownership of common
stock and other of our equity securities, on Forms 3, 4 and 5 respectively.
Executive officers, directors and greater than 10% shareholders are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
reports they file. To the best of our knowledge (based solely upon a review of
the Form 3, 4 and 5 filed), no officer, director or 10% beneficial shareholder
failed to file on a timely basis any reports required by Section 16(a) of the
Securities Exchange Act of 1934, as amended.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer. No other executive officer(s) received
compensation for the fiscal year 2002 in excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
------ -------
SECURITIES
OTHER UNDER-
ANNUAL RESTRICTED LYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
(A) (B) (C) (D) (F) (F) (G) (H) (I)
--- --- --- --- --- --- --- --- ---
Joseph Postbinder 2001 45,000 0 0 0 0 0 0
Joseph Postbinder 2002 45,000 0 0 0 0 0 0
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK MATTERS
The following table sets forth the number of shares of common stock
beneficially owned as of March 31, 2003 by (i) those persons or groups known to
the Company who will beneficially own more than 5% of the Company's common
stock; (ii) each director and director nominee; (iii) each executive officer
whose compensation exceeded $100,000 in the fiscal year ended December 31, 2002;
and, (iv) all directors and executive officers as a group. The information is
determined in accordance with Rule 13(d)-3 promulgated under the Exchange Act
based upon information furnished by persons listed or contained in filings made
by them with the Securities and Exchange Commission by information provided by
such persons directly to the Company. Except as indicated below, the
stockholders listed possess sole voting and investment power with respect to
their shares.
27
At December 31, 2002 we did not have any equity compensation plans.
TOTAL NUMBER OF
NUMBER/TITLE SHARES PERCENTAGE OWNERSHIP
Joseph Postbinder
Chairman of the Board
and CEO
36 Hatziunut Street 19,440,212 (3) 76%
Gani Barnea Ashkelon, Israel 78741
Baruch Tosh
President
58 Shapira Street ___ *
Petach-Tikva, Israel 49600
Meira Postbinder
Vice President of Financing
Secretary, Treasurer, and Director 9,788 (3) *
36 Hatziunut Street
Gani Barnea Ashkelon, Israel 78741
Dan Zarchin
Vice President of Marketing
Director ___ *
16 Hannahal Street
Raanana, Israel
Tsippy Moldovan
Managing Director of Finance
Director 55,000 * *
34 Hazionut Street
Ashkelon, Israel
Avraham Hatzor
Director
10 Kehilat Saloniki St. 262,500 *
Tel Aviv, Israel
Peter Zoltan
Director
18034 Ventura Blvd. 100,000 *
Encino, California 91316, USA
Moti Hassan
Director
300/3 Hakikayon St ___ ___
Ashkelon, Israel
All officers and directors
as a whole (8 persons) 19,867,500 78%
* Less than 1% percent
_______________________________
28
(1) Based upon 25,550,000 shares outstanding.
(2) Meira Postbinder is the spouse of Joseph Postbinder.
(4) Includes 239,477 shares held through Achidatex Holding Company and 23,023
shares held directly.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
FACILITY LEASE
Defense leases a building in the Erez Industrial Zone, owned by Joseph
Postbinder our Chairman and CEO for $7,119 per month for 2,500 square meters.
The terms of the lease were not the result of an arms' length transaction.
NOTES RECEIVABLE FROM OFFICER
As of December 31, 2002, the Company had an outstading loan evidenced by a
Promissory Note, dated as of January 15, 2002 from Joseph Postbinder totaling
$400,000. The loan accrued interest at 8% per annum and was due and payable on
December 15, 2002. For the fiscal year ended December 31, 2002 total interest
income from notes receivable from stockholders approximated $31,000. The balance
of the Promissory Note at December 31, 2002 was $380,986. As settlement for the
Promissory Note the Company has agreed to the following payment terms.
o Cash payment in the amount of $75,960; payable $29,360 on May 31,
2003, $28,300 on June 30, 2003; $18,300 on July 31, 2003
o $20,598 of payments made by Mr. Postbinder on behalf of the Company
o Forfeiture of one year of lease payments owed to Mr. Postbinder from
the Company in the amount of $7,119 per month, for total payments of
$84,428.
o Delivery of 327,869 shares of Company stock held by Mr. Postbinder
valued at $200,000. The values determined by reference to the closing
bid price of $.61 of the Company common stock on December 31, 2002.
At December 31, 2002, the Company was not in compliance with the
Sarbanes-Oxley Act of 2002. As this note was not satisfied at maturity, it is
deemed to be a violation of the newly enacted Sarbanes-Oxley Act of 2002. As
indicated above, the Company intends on remedying this in 2003. Uncertainty
exists as to the ultimate resolution of the matter and whether such resolution
will have a material impact on the Company's consolidated financial position and
results of operations. There are no accruals in the accompanying consolidated
balance sheet at December 31, 2002, for this uncertainty.
29
ITEM 13. EXHIBITS AND REPORTS ON 8K.
(A) EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB. Where so indicated by footnote, exhibits that were previously filed
are incorporated by reference.
Exhibit
Number DESCRIPTION
3.1 Certificate of Incorporation, Incorporated herein by reference from the
filing on Form filing on Form 10SB File No. 000-30105.
3.2 Certificate of Amendment to the Certificate of Incorporation, incorporated
herein by reference from the Filing on Schedule 14C, filed with the
Commission on December 30, 2002.
4.1 Share Exchange Agreement, dated March 25, 2002, incorporated herein by
reference from the Filing on Form 8-K filed with the Commission on April
14, 2002.
23.1 Subsidiaries of the Company*
99.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Title 18 United States. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
*Filed herewith
(B) Reports on Form 8-K.
NONE.
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the Company's periodic reports filed with the
Commission under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the periodic reports filed
under the Securities Exchange Act of 1934 is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Within the 90 days prior to the filing date of this Report, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-14. This evaluation was conducted under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer.
30
Based upon that evaluation, the Company's officers concluded that many of
the Company's disclosure controls and procedures are effective in gathering,
analyzing and disclosing information needed to satisfy the Company's disclosure
obligations under the Securities Exchange Act of 1934. For example, the
Company's internal controls, particularly in the areas of payroll, control of
cash, accounts payable, inventory and accounts receivable, are effective. In
addition, the Board of Directors meets with the Chief Financial Officer on a
regular basis to review and evaluate the Company's financial position.
The Company's officers also identified a weakness in the Company's
disclosure controls. Such weakness and the steps the Company plans to take to
remedy the weakness, are discussed below.
The Company entered into consulting agreements at the end of 2001 and
during 2002 that were not disclosed timely in its filings with the SEC.
Additionally, the minutes of the meetings of the Company's Board of
Directors did not document the approval of such consulting agreements.
Remedy: The Company has implemented procedures in 2003 to ensure that all
significant agreements are documented in the minutes of the meetings of the
Board of Directors and that these agreements are disclosed in SEC filings
timely.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls since the most
recent evaluation of such controls. The Company intends to make improvements, as
outlined above, to its disclosure controls.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DEFENSE INDUSTRIES INTERNATIONAL, INC.
Dated: May 2, 2003 /S/ JOSEPH POSTBINDER
---------------------
Name: Joseph Postbinder
Title: Chairman and CEO
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Dated: May 2, 2003 /S/ JOSEPH POSTBINDER
---------------------
Name: Joseph Postbinder
Title: Chairman and CEO
Dated: May 2, 2003 /S/ BARUCH TOSH
---------------------
Name: Baruch Tosh
Title: President
Dated: May 2, 2003 /S/ MERIA POSTBINDER
---------------------
Name: Meira Postbinder
Title: V.P. of Financing and Director
Dated: May 2, 2003 /S/ TSIPPY MOLDOVAN
---------------------
Name: Tsippy Moldovan
Title: Secretary
Dated: May 2, 2003 /S/ AVARHAM HAZTOR
---------------------
Name: Avraham Hatzor
Title: COO and Director
Dated: May 2, 2003 /S/ DAN ZARCHIN
---------------------
Name: Dan Zarchin
Title: Director
Dated: May 2, 2003 /S/ PETER ZOLTAN
---------------------
Name: Peter Zoltan
Title: Director
Dated: May 2, 2003 /S/ MOTI HASSAN
---------------------
Name: Moti Hassan
Title: Director
32
CERTIFICATIONS
I, Joseph Postbinder , certify that:
1. I have reviewed this report on Form 10-KSB of Defense Industries
International, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
(c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
33
May 2, 2003 /S/ JOSEPH POSTBINDER
---------------------
Joseph Postbinder
Chairman and CEO
I, Meira Postbinder, certify that:
1. I have reviewed this report on Form 10-KSB of Defense Industries, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
(c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
34
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
May 2, 2003 /S/ MERIA POSTBINDER
---------------------
Meira Postbinder
V.P. of Financing and Director
35
Exhibit 23.1
Export Erez Ltd.
Mayotex Ltd.
Achidatex Nazareth Elite Ltd.
Dragonwear Trading Ltd.
36
Exhibit 99.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of
the undersigned officers of Camera Platforms, Inc. (the Company), does hereby
certify, to such officer's knowledge, that:
The Report on Form 10-KSB for the fiscal year ended December 31, 2002 of
the Company fully complies, in all material respects, with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information
contained in the Form 10-KSB fairly presents, in all material respects, the
financial condition and results of operations of the Company.
May 2, 2003 /S/ JOSEPH POSTBINDER
---------------------
Joseph Postbinder
Chairman and CEO
/S/ MERIA POSTBINDER
---------------------
Meira Postbinder
V.P. of Finance
37
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.)
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.)
AND SUBSIDIARIES
CONTENTS
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGES 2 - 3 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
PAGE 4 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS
ENDED DECEMBER 31, 2002 AND 2001
PAGE 5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001
PAGE 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
PAGES 7 - 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Defense Industries International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Defense
Industries International, Inc. (formerly Pawnbrokers Exchange, Inc.) and
Subsidiaries as of December 31, 2002 and 2001 and the related consolidated
statements of income and comprehensive income (loss), changes in shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As more fully described in Note 2 of the notes to the consolidated financial
statements, an error resulting in an understatement of previously reported
depreciation expense for the year ended December 31, 2001 was discovered by
management of the Company during 2002. Accordingly, the consolidated balance
sheet as of December 31, 2001 and the statements of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 2001 have
been restated to reflect corrections to previously reported amounts.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Defense Industries
International, Inc. (formerly Pawnbrokers Exchange, Inc.) and Subsidiaries as of
December 31, 2002 and 2001 and the results of their operations and their cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
April 8, 2003
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2001
2002 (As Restated)
----------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 831,820 $ 781,996
Trade accounts receivable, net of allowance for doubtful accounts
of $108,765 and $93,653, respectively 1,965,918 2,461,671
Inventories 1,734,966 1,956,072
Trade accounts receivable - related parties, net 209,165 181,059
Note receivable - officer 380,986 -
Other assets 186,868 274,840
Deferred taxes 153,294 97,761
----------------- -----------------
Total Current Assets 5,463,017 5,753,399
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, NET 1,847,642 1,951,147
----------------- -----------------
OTHER ASSETS
Investment in marketable securities 479,595 616,105
Deposits for the severance of employer-employee relations 414,350 472,421
Deferred taxes, long-term 171,703 400,689
Intangible assets 47,475 61,452
----------------- -----------------
Total Other Assets 1,113,123 1,550,667
----------------- -----------------
TOTAL ASSETS $ 8,423,782 $ 9,255,213
================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
2
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
LIABILITIES AND SHAREHOLDERS' EQUITY
2001
2002 (As Restated)
---------------- ---------------
CURRENT LIABILITIES
Trade accounts payable $ 982,802 $ 1,551,470
Other accounts payable and credit balances 748,188 1,011,062
Short-term bank credit 425,998 894,981
Current portion of long-term debt 435,152 371,344
---------------- ---------------
Total Current Liabilities 2,592,140 3,828,857
---------------- ----------------
LONG-TERM LIABILITIES
Long-term loans 762,732 1,295,440
Long-term loan - related party - 47,432
Provision for the severance of employer-employee relations 397,936 431,522
Minority interest 817,888 572,106
---------------- ----------------
Total Long-Term Liabilities 1,978,556 2,346,500
---------------- ----------------
TOTAL LIABILITIES 4,570,696 6,175,357
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.0001 par value, 50,000,000 shares authorized,
none issued and outstanding - -
Common stock, $.0001 par value, 250,000,000 shares authorized,
25,100,000 and 21,000,000 issued and outstanding, respectively 2,510 2,100
Common stock to be issued (250,000 shares) 25 -
Additional paid-in capital 1,711,450 1,145,385
Retained earnings 2,640,010 2,396,616
Accumulated other comprehensive loss (457,909) (464,245)
Deferred consulting expense (43,000) -
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 3,853,086 3,079,856
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,423,782 $ 9,255,213
================ ================
The accompanying notes are an integral part of the consolidated financial
statements.
3
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2001
2002 (As Restated)
--------------- --------------
NET REVENUES $ 10,629,600 $ 8,941,013
COST OF SALES AND PROCESSING 6,790,980 6,230,974
--------------- ---------------
GROSS PROFIT 3,838,620 2,710,039
--------------- ---------------
OPERATING EXPENSES
Selling expenses 663,605 341,536
General and administrative expenses 1,955,727 1,260,094
--------------- ---------------
Total Operating Expenses 2,619,332 1,601,630
--------------- ---------------
INCOME FROM OPERATIONS 1,219,288 1,108,409
--------------- ---------------
OTHER INCOME (EXPENSE)
Financial expense, net (148,852) (154,117)
Impairment loss on marketable securities (282,435) -
Other income 27,429 59,692
--------------- ---------------
Total Other Income (Expense) (403,858) (94,425)
--------------- ---------------
INCOME BEFORE INCOME TAXES 815,430 1,013,984
Less: income tax expense 313,038 333,789
--------------- ---------------
Income before minority interest 502,392 680,195
Minority interest 258,998 107,481
--------------- ---------------
NET INCOME 243,394 572,714
--------------- ---------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss), net of minority interest
loss of $8,225 and $4,997, respectively (162,225) (179,474)
Unrealized loss on available-for-sale securities (5,128) (149,360)
--------------- ---------------
Other comprehensive loss before tax (167,353) (328,834)
Income tax benefit related to items of other comprehensive income (loss) 60,247 118,380
--------------- ---------------
TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX (107,106) (210,454)
--------------- ---------------
COMPREHENSIVE INCOME $ 136,288 $ 362,260
=============== ===============
Net income per share - basic and diluted $ 0.01 $ 0.03
=============== ===============
Weighted average number of shares outstanding - basic and diluted 24,265,479 20,516,709
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
4
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Common Stock Additional
Common Stock To Be Issued Paid-In
Shares Amount Shares Amount Capital
---------- --------- ---------- ---------- -------------
Balance, December 31, 2000 19,949,992 $ 1,995 - $ - $ 158,640
Issuance of common stock to acquire
Achidatex Ltd. 1,050,008 105 - - 986,745
Foreign currency translation loss - - - - -
Unrealized loss on available for sale
securities - - - - -
Net income, 2001 - - - - -
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 as
previously reported 21,000,000 2,100 - - 1,145,385
Prior period adjustment to account
for additional depreciation expense - - - - -
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 (as
restated) 21,000,000 2,100 - - 1,145,385
Common stock transferred in
recapitalization 4,000,000 400 - - (400)
Common stock issued for services 100,000 10 - - 171,990
Common stock to be issued for services - - 250,000 25 394,475
Impairment loss recognized on other
than temporary decline in marketable
securities - - - - -
Foreign currency translation loss - - - - -
Unrealized loss on available for sale
securities - - - - -
Net income, 2002 - - - - -
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 25,100,000 $ 2,510 250,000 $ 25 $ 1,711,450
=========== =========== =========== =========== ===========
Accumulated
Other Deferred
Retained Comprehensive Consulting
Earnings Loss Expense Total
----------- ----------- ----------- -----------
Balance, December 31, 2000 $ 1,823,902 $ (130,414) $ - $ 1,854,123
Issuance of common stock to acquire
Achidatex Ltd. - - - 986,850
Foreign currency translation loss - (184,471) - (184,471)
Unrealized loss on available for sale
securities - (149,360) - (149,360)
Net income, 2001 644,767 - - 644,767
----------- ----------- ----------- -----------
Balance, December 31, 2001 as
previously reported 2,468,669 (464,245) - 3,151,909
Prior period adjustment to account
for additional depreciation expense (72,053) - - (72,053)
----------- ----------- ----------- -----------
Balance, December 31, 2001 (as
restated) 2,396,616 (464,245) - 3,079,856
Common stock transferred in
recapitalization - - - -
Common stock issued for services - - (43,000) 129,000
Common stock to be issued for services - - - 394,500
Impairment loss recognized on other
than temporary decline in marketable
securities - 169,984 - 169,984
Foreign currency translation loss - (158,520) - (158,520)
Unrealized loss on available for sale
securities - (5,128) - (5,128)
Net income, 2002 243,394 - - 243,394
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 $ 2,640,010 $ (457,909) $ (43,000) $ 3,853,086
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2001
2002 (As Restated)
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 243,394 $ 572,714
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 286,995 191,177
Stock issued and to be issued for services 523,500 -
Deferred taxes 173,453 288,733
Minority interest in income of subsidiary 258,998 107,480
Impairment loss on investments in marketable securities 282,435 -
Gain from sale of fixed assets (26,891) (25,336)
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 467,646 29,590
Decrease in other receivables and debit balances 56,673 214,296
Decrease (increase) in deposits for employee severance 58,071 (10,911)
Decrease in inventory 221,106 217,234
Decrease in trade accounts payable (568,668) (983,713)
(Decrease) increase in other accounts payable and credit balances (212,560) 311,820
(Decrease) increase in provision for the severance of employer-employee relations (33,586) 10,752
--------------- ---------------
Net Cash Provided By Operating Activities 1,730,566 923,836
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (254,503) (108,129)
Proceeds from sale of property, plant and equipment 64,779 51,206
Cash acquired in acquisition of Achidatex - 39,147
Advances related to acquisition - 56,820
Pre-acquisition loan to subsidiary - (480,000)
Funds advanced on behalf of shareholder (400,000) -
Purchases of marketable securities (38,486) (37,620)
--------------- ---------------
Net Cash Used In Investing Activities (628,210) (478,576)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit, net (468,983) (1,899,604)
Proceeds from long term debt - 1,592,852
Payments on long-term debt (468,900) -
Loan payable - related party (47,432) 47,432
--------------- ---------------
Net Cash Used In Financing Activities (985,315) (259,320)
--------------- ---------------
EFFECT OF EXCHANGE RATES CHANGES ON CASH (67,217) (67,239)
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 49,824 118,701
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 781,996 663,295
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 831,820 $ 781,996
=============== ===============
INTEREST PAID $ 174,814 $ -
=============== ===============
TAXES PAID $ 82,243 $ -
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2002, an aggregate amount of $50,314 of expenses paid by an officer on
behalf of the Company (resulting in a payable) was offset with a corresponding
reduction in accrued interest and principal on the note receivable - officer of
$31,300 and $19,014, respectively.
On June 8, 2001, the Company issued 657,900 shares of common stock to acquire
Achidatex Nazareth Elite (1977) Ltd. The Company acquired assets totaling
approximately $6,240,000 and assumed liabilities of approximately $5,250,000.
The accompanying notes are an integral part of the consolidated financial
statements.
6
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 1 DESCRIPTION OF BUSINESS
Export Erez, Ltd. was incorporated in Israel and commenced operations in
1983. Export Erez, Ltd. manufactures textile products designed mainly for
the defense industry, although in recent years it has penetrated additional
markets in Israel and overseas, in both the military and civilian
industries.
Export Erez, Ltd.'s wholly owned subsidiary Mayotex Ltd., was incorporated
in Israel in 1990. Mayotex is engaged in weaving fabric and tapes, which it
sells to Export Erez, Ltd. and to other customers. It also produces end
products for civilian industries requiring fabric with special qualities
(high degrees of strength, waterproofing, etc.). Mayotex also produces
animal products such as stripes, collars, etc.
Export Erez Ltd.'s wholly owned subsidiary Dragonwear Trading Ltd., was
incorporated in Cyprus in October 2000. Dragonwear is involved with trading
textile products.
On April 21, 2000, Export Erez USA, Inc. ("Export USA"), a totally inactive
corporation, consummated an Agreement and Plan of Reorganization (the
"Agreement") with Export Erez, Ltd. ("Export Ltd.") whereby all of the
shareholders in Export Ltd. had their shares converted into 18,353,993
(retroactively restated) shares of Export USA, or approximately 96% of the
common stock of Export USA. Under generally accepted accounting principles,
a company whose shareholders receive over fifty percent of the stock of the
surviving entity in a business combination is considered the acquirer for
accounting purposes. Accordingly, the transaction was accounted for as an
acquisition of Export USA and a recapitalization of Export Ltd.
On June 18, 2001, Export USA acquired 76% of the total share capital of
Achidatex Nazareth Elite (1977) Ltd. ("Achidatex") (See Note 3).
On March 25, 2002, under a share exchange agreement (the "Agreement"),
Pawnbrokers Exchange, Inc. ("PEI"), a reporting public company with no
operations at that time, acquired 100% of the issued and outstanding common
stock of Export Erez USA, Inc. in exchange for 21,000,000 shares of common
stock of PEI. Immediately after the acquisition, there were 25,000,000
shares of PEI outstanding. As a result of the exchange, Export USA became a
wholly owned subsidiary of PEI and the shareholders of Export USA became
shareholders of approximately 84% of PEI. Generally accepted accounting
principles require that the company whose shareholders retain a majority
interest in a business combination be treated as the acquirer for
accounting purposes. As a result, the exchange was treated as an
acquisition of PEI by Export USA and a recapitalization of Export USA.
Accordingly, the consolidated financial statements will include the
following: (1) The balance sheet will consist of the net assets of the
acquirer at historical cost and the net assets of the acquiree at
historical cost on the date of the acquisition; (2) The statements of
operations include the operations of the accounting acquirer for the
periods presented and the operations of the acquiree from the date of the
acquisition.
7
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
Effective March 25, 2002, PEI began doing business as Defense Industries
International, Inc. On July 8, 2002, PEI changed its corporate domicile
from the State of Utah to the State of Nevada (the "re-incorporation"). In
order to accomplish the re-incorporation, PEI merged with and into its
wholly owned subsidiary, Defense Industries International, Inc., ("Defense
Industries") a Nevada corporation organized on July 1, 2002. As a result of
the re-incorporation, PEI's name was changed from Pawnbrokers Exchange,
Inc. to Defense Industries International, Inc. Each share of Pawnbrokers
capital stock issued and outstanding on the effective date was converted
into and exchanged for one share of Defense Industries capital stock.
Defense Industries is authorized to issue 250,000,000 shares of $.0001 par
value common stock and 50,000,000 shares of $.0001 par value preferred
stock. As a result, common stock changed from no par value to a par value
of $.0001. Accordingly, the consolidated balance sheet and the consolidated
statement of changes in shareholders' equity have been retroactively
restated to effectuate the change.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements are presented in United
States dollars under accounting principles generally accepted in the United
States of America.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for 2002 include the accounts of
Defense Industries International, Inc. (formerly Pawnbrokers Exchange, Inc.
(see Note 1) and its wholly owned subsidiaries, Export Erez, USA, Inc.,
Export Erez, Ltd., Mayotex, Ltd. and Dragonwear Trading Ltd. and its 76%
owned subsidiary Achidatex Nazareth Elite (1977) Ltd. (collectively, the
"Company"). The minority interest represents the minority shareholders'
proportionate share of Achidatex.
The consolidated financial statements for 2001 include the accounts of
Export Erez, USA, Inc. and its wholly owned subsidiaries, Export Erez,
Ltd., Mayotex, Ltd. and Dragonwear Trading Ltd. for the periods ended
September 30, 2001 and its 76% owned subsidiary Achidatex Nazareth Elite
(1977) Ltd. from June 18, 2001, the date of acquisition (See Note 3).
All intercompany accounts and transactions have been eliminated in
consolidation.
8
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
(C) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The accompanying consolidated financial statements are presented in United
States dollars. The functional currency of Export Erez, Ltd., Mayotex Ltd.,
and Achidatex Nazareth Elite is the New Israeli Shekel (NIS). The
functional currency of Dragonwear Trading Ltd. is the Cyprus Pound (CYP).
The financial statements of Dragonwear are translated into NIS. The
financial statements for all of these entities are then translated into
United States dollars from NIS at year-end exchange rates as to assets and
liabilities and weighted average exchange rates as to revenues and
expenses. Capital accounts are translated at their historical exchange
rates when the capital transactions occurred.
Foreign currency transaction gains or losses from transactions denominated
in currencies other than NIS are recognized in net income in the period the
gain or loss occurs. During 2002 and 2001, gains of $37,944 and $27,048,
respectively are included in financial expense, net in the accompanying
consolidated statements of income and comprehensive income (loss).
(D) COMPREHENSIVE INCOME (LOSS)
The foreign currency translation gains (losses) resulting from the
translation of the financial statements of the Company and its subsidiaries
expressed in NIS to United States dollars are reported as Other
Comprehensive Income (Loss) in the Statement of Income and as Accumulated
Other Comprehensive Income (Loss) in the Statement of Shareholders' Equity.
The unrealized gains and losses, net of tax, resulting from the valuation
of available-for-sale securities at their fair market value at year end are
reported as Other Comprehensive Income (Loss) in the Statement of Income
and as Accumulated Other Comprehensive Income (Loss) in the Statement of
Shareholders' Equity.
Amounts reported in net income and other comprehensive income for the years
ended December 31, 2002 and 2001 are presented net of an assumed tax rate
of 36% as follows:
2002 2001
---------------- ----------------
Net income:
Gain (loss) on sales of securities $ - $ -
Income tax benefit (expense) - -
---------------- ----------------
$ - $ -
================ ================
Other comprehensive income (loss):
Holding gain (loss) arising during period, net of tax $ (75,251) $ (95,590)
Reclassification adjustment, net of tax 71,969 -
---------------- ----------------
Net gain (loss) recognized in other comprehensive income $ (3,282) $ (95,590)
================ ================
9
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
(E) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that effect the
reported amounts of assets and liabilities and disclose the nature of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are principally non-derivative assets
and non-derivative liabilities (non-derivative assets include cash and cash
equivalents, deposits in banks and other financial institutions, marketable
securities, trade accounts receivable, other receivables and debit
balances; non-derivative liabilities include short-term credit from banks
and others, trade accounts payable, and other payables and credit
balances). Because of the nature of these financial instruments, fair value
generally equals or approximates the amounts presented in the financial
statements.
(G) CONCENTRATIONS OF CREDIT RISK
At December 31, 2002 and 2001, the Company held cash and cash equivalents,
in the aggregate amount of $831,820 and $781,996, respectively, and most of
these amounts were deposited with Israeli banks. Under Israeli law, the
Bank of Israel insures all bank deposits without limits on the amount.
Therefore, the Company does not anticipate losses in respect to these
items.
The majority of the Company's sales are made to government institutions and
private industry in Israel. Consequently, the exposure to credit risks
relating to trade receivables is limited.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. An appropriate allowance for
doubtful accounts is included in trade accounts receivable.
(H) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
10
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
(I) INVESTMENT IN MARKETABLE SECURITIES
The Company invests in mutual funds in Israel. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity. In
determining realized gains and losses, the cost of the securities sold is
based on the specific identification method. The Company reviews each
marketable security to determine whether a decline in fair market value is
other than temporary. If the decline is deemed other than temporary, the
cost basis of the individual security is written down to fair market value
as a new cost basis and the amount written down is included in operations
as a realized loss. During 2002, the Company recognized an aggregate amount
of $282,435 as other than temporary declines in marketable securities.
(J) INVENTORIES
Inventories are valued at the lower of cost or market value using the
first-in first-out method for raw materials. The cost includes expenses of
freight-in transportation. The specific identification method is used for
finished goods since all orders are custom orders for customers.
(K) PROPERTY AND EQUIPMENT
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives
of three to twenty-five years.
These long-lived assets are generally evaluated on an individual basis in
making a determination as to whether such assets are impaired.
Periodically, the Company reviews its long-lived assets for impairment
based on estimated future nondiscounted cash flows attributed to the
assets. In the event such cash flows are not expected to be sufficient to
recover the recorded value of the assets, the assets are written down to
their estimated fair values. There has been no impairment loss recorded for
the years ended December 31, 2002 and 2001.
(L) INTANGIBLE ASSETS
Intangible assets are being amortized using the straight-line method over
the estimated useful life of eight years.
(M) REVENUE RECOGNITION
Revenues from sales of products are recognized under the completed contract
method upon shipment to customers. The contracts are short term, generally
under two months. The Company provides a warranty on goods ranging from
three to four years. The Company's policy is to consider the establishment
of a reserve for warranty expenses. Based upon historical experience of no
warranty claims, the Company has not established a reserve at December 31,
2002 and 2001.
11
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
(N) SEGMENTS
During 2002 and 2001, the Company operated and managed two strategic
business units: the civilian market and the military market. The military
market is further broken down between local and export sales in order to
better analyze trends in sales and profit margins. The Company does not
allocate assets between segments because assets are used in more than one
segment and any allocation would be impractical (See Note 17(A) for segment
information).
(O) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(P) PER SHARE DATA
Basic net income per common share is computed based on the weighted average
common shares outstanding during the year. Diluted net income per common
share is computed based on the weighted average common shares and common
stock equivalents outstanding during the year. The computation of weighted
average common shares outstanding gives retroactive effect to the
recapitalization and the re-incorporation discussed in Note 1. There were
no common stock equivalents outstanding at December 31, 2002 and 2001
because the exercise price of the common stock equivalents exceeded the
average market price of the stock. Accordingly, a reconciliation between
basic and diluted earnings per share is not presented.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that
requires companies to classify certain gains and losses from debt
extinguishments as extraordinary items, eliminates the provisions of SFAS
No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the
provisions of SFAS No. 13 to require that certain lease modifications be
treated as sale leaseback transactions. The provisions of SFAS 145 related
to classification of debt extinguishments are effective for fiscal years
beginning after May 15, 2002. Earlier application is encouraged.
12
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. Under
SFAS 146, the Company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be
measured at fair value. SFAS 146 will require the Company to disclose
information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated
and in any subsequent period until the activity is completed. SFAS 146 is
effective prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a
company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company
had previously recorded under Emerging Issues Task Force Issue 94-3.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure
- an amendment of FASB Statement No. 123." SFAS 148 amends FASB Statement
No. 123, "Accounting for Stock Based Compensation" and provides alternative
methods for accounting for a change by registrants to the fair value method
of accounting for stock-based compensation. Additionally, SFAS 148 amends
the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock based-compensation and the
related pro forma disclosures when the intrinsic value method continues to
be used. The statement is effective for fiscal years beginning after
December 15, 2002, and disclosures are effective for the first fiscal
quarter beginning after December 15, 2002.
The adoption of these pronouncements will not have a material effect on the
Company's consolidated financial position or results of operations.
(R) PRIOR PERIOD ADJUSTMENT
The accompanying consolidated balance sheet as of December 31, 2001 has
been restated to correct an error for the understatement of depreciation
expense during 2001. The effect of the restatement was to increase
depreciation expense and decrease net income for 2001 by $72,053. Retained
earnings and property, plant and equipment, net in the December 1, 2001
consolidated balance sheet and retained earnings in the consolidated
statement of changes in shareholders' equity have been restated for the
effect of the prior period adjustment. The effect of the error did not
affect the previously reported earnings per share of $.03 (retroactively
restated for the recapitalization discussed in Note 15(A)) for the year
ended December 31, 2001.
13
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 3 BUSINESS COMBINATION
Effective June 18, 2001, the Company acquired 76% of the total common stock
of Achidatex Nazareth Elite (1977) Ltd. ("Achidatex") by issuing 1,050,008
shares of its common stock valued at $1.50 per share resulting in a total
purchase price of $986,850. Achidatex was a private company (incorporated
in Israel in 1977) that manufactures and markets ballistic shields. The
acquisition has been accounted for as a purchase, and accordingly, the
consolidated financial statements have been prepared to include the results
of operations of Achidatex beginning from the date of acquisition. The
excess of the total net fair value of the assets acquired of $1,471,314
over the purchase price of $986,850, in the amount of $484,464, has been
recorded as a reduction in the fair market value assigned to the fixed
assets of Achidatex.
Following are the summarized unaudited pro forma consolidated results of
operations for the year ended December 31, 2001, assuming the acquisition
had taken place at the beginning of that fiscal year. The unaudited pro
forma results are not necessarily indicative of future earnings or earnings
that would have been reported had the acquisition been completed when
assumed.
2001
------------------
Net revenues $ 11,825,534
Income (loss) before income taxes 1,374,176
Income tax expense 307,287
Minority interest earnings (losses), net of tax 347,785
Net income (loss) 1,333,678
Net income (loss) per share 0.07
NOTE 4 OTHER RECEIVABLES AND DEBIT BALANCES
2002 2001
---------------- ----------------
Government institutions $ 48,465 $ 118,500
Employees and institutions for wage - 34,124
Advances to suppliers and service providers 72,139 83,255
Prepaid expenses 27,214 11,723
Lease deposits 13,361 9,861
Shareholder loans receivable 25,689 17,377
---------------- ----------------
$ 186,868 $ 274,840
================ ================
14
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 5 INVESTMENT IN MARKETABLE SECURITIES
The investments in marketable securities represent participation
certificates in mutual funds in Israel. The Company classifies its
investments in marketable securities as available for sale securities,
which it intends to hold for more than one year as non-current. Unrealized
holding gains and losses are reported as a separate component of
shareholders' equity as part of other comprehensive income (loss), until
realized. A reconciliation of original cost to fair market value for
securities held at December 31, 2002 and 2001 follows:
2002 2001
---------------- ----------------
Investment in marketable securities, at cost $ 767,158 $ 786,089
Realized loss (282,435) -
Unrealized loss (5,128) (169,984)
---------------- ----------------
Investment in marketable securities at fair market value 479,595 616,105
Less current portion - -
---------------- ----------------
Non-current portion $ 479,595 $ 616,105
================ ================
NOTE 6 INVENTORIES
Inventories at December 31, 2002 and 2001 consist of the following:
2002 2001
----------------- -----------------
Raw materials $ 927,821 $ 1,166,086
Work in progress 584,487 491,237
Finished goods 222,658 298,749
----------------- -----------------
$ 1,734,966 $ 1,956,072
================= =================
NOTE 7 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2002 and 2001consisted of the
following:
15
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
2002 2001 Estimated
Useful Life
----------------- ---------------- ------------------
Buildings $ 145,376 $ 156,814 15 - 25 Years
Leasehold improvements 229,646 237,814
Motor Vehicles 317,985 267,501 5 - 7 Years
Office Equipment and Furniture 256,170 251,113 3 - 14 Years
Equipment 2,374,563 2,405,034 5 Years
----------------- ----------------
3,323,740 3,318,276
Less: Accumulated Depreciation (1,476,098) (1,367,129)
----------------- ----------------
$ 1,847,642 $ 1,951,147
================= ================
Depreciation expense for the years ended December 31, 2002 and 2001 was
$273,018 and $174,666, respectively.
NOTE 8 INTANGIBLE ASSETS
In October 2000, the Company purchased the knowledge to manufacture ceramic
plates with a ballistic cloth covering for $89,100. This amount is being
amortized over the estimated useful life of eight years.
Intangible assets at consisted of the following:
2002 2001
---------------- ----------------
Purchased manufacturing knowledge $ 89,100 $ 89,100
Less accumulated amortization (41,625) (27,648)
---------------- ----------------
$ 47,475 $ 61,452
================ ================
Amortization expense for the purchased manufacturing knowledge for the year
ended December 31, 2002 and 2001 was $13,977 and $16,511, respectively.
NOTE 9 SHORT-TERM BANK CREDIT
Short-term bank credit at December 31, 2002 and 2001 was comprised as
follows:
16
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
Interest Rates 2002 2001
-------------------- ---------------- ----------------
Overdraft credit 7% - 12% $ 336,267 $ 604,636
Loans linked to the Consumer Price Index 6% - 12% 47,531 38,934
Short-term bank loan 11.65% 42,200 251,411
---------------- ----------------
$ 425,998 $ 894,981
================ ================
The overdraft credit is a revolving credit facility due on demand. The
loans linked to the CPI are due in monthly principal and interest
installments totaling $9,701. The short-term bank loan is due in twelve
monthly installments of approximately $3,742 per installment.
To secure its short-term liabilities and long-term loans (See Note 11), the
Company has registered unlimited charges on its assets in favor of several
Israeli banks on all assets, securities, notes and other trade instruments
which are deposited with the banks.
NOTE 10 OTHER ACCOUNTS PAYABLE AND CREDIT BALANCES
2002 2001
---------------- -----------------
Government $ 33,377 $ -
Employees and institutions for wage 205,745 425,869
Shareholder loans payable - 19,703
Advances from customers 15,275 228,169
Accrued expenses and taxes 493,791 337,321
---------------- -----------------
$ 748,188 $ 1,011,062
================ =================
NOTE 11 LONG-TERM LOANS
On January 23, 2002, the Company borrowed $16,000 at an interest rate of
LIBOR plus 1%. The terms are 24 monthly payments commencing February 23,
2002 with each payment consisting of a fixed amount of principal along with
accrued interest. As of December 31, 2002, the balance of the loan was
$8,027, of which $7,406 is short-term.
On September 1, 2002, the Company borrowed $160,000 at an interest rate of
LIBOR plus 1%. The terms are 24 monthly payments commencing October 1, 2002
with each payment consisting of a fixed amount of principal along with
accrued interest. As of December 31, 2002, the balance of the loan was
$141,841, of which $78,172 is short-term.
17
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
On June 18, 2001, the Company borrowed $455,200 at an interest rate of 10%.
The terms are 60 monthly payments commencing July 18, 2001 with each
payment consisting of principal along with accrued interest. As of December
31, 2002, the balance of the loan was $207,409, of which $94,826 is
short-term.
On November 1, 2001, the Company borrowed $113,800 at an interest rate of
6%. The terms are 24 monthly payments commencing December 1, 2001 with each
payment consisting of a fixed amount of principal along with accrued
interest. As of December 31, 2002, the balance of the loan was $51,588, all
of which is short-term.
On November 4, 2001, the Company borrowed $1,138,000 at an interest rate of
7.3%. The terms are 60 monthly payments commencing December 4, 2001 with
each payment consisting of a fixed amount of principal along with accrued
interest. As of December 31, 2002, the balance of the loan was $786,725, of
which $200,866 is short-term.
On March 7, 2000, the Company borrowed $27,500 at an interest rate of 8.2%.
The terms are 36 monthly payments commencing April 1, 2000 with each
payment consisting of a fixed amount of principal along with accrued
interest. As of December 31, 2002, the balance of the loan was $2,294, all
of which is short-term.
All of the Company's long-term loans listed above are collateralized by a
floating guarantee of essentially all of the Company's assets (See Note 9).
Required principal payments (including current maturities) on long-term
loans at December 31, 2002 are as follows:
YEAR Amount
-------- -----------------
2003 $ 435,152
2004 369,393
2005 209,212
2006 184,127
-----------------
Less: current portion 435,152
-----------------
Long-term loans $ 762,732
=================
18
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 12 DEPOSITS AND PROVISIONS FOR THE SEVERANCE OF EMPLOYER-EMPLOYEE RELATIONS
2002 2001
--------------- ---------------
Deposits for the severance of employer-employee relations $ 414,350 $ 472,421
Provision for the severance of employer-employee relations $ 397,936 $ 431,522
Under the Israeli Severance Pay Law, the Company is required to make
severance payments to terminated employees who have been employed at least
one year. The calculation is based on the employee's latest salary and the
period employed whereby the employee is entitled to one month of severance
pay for each year employed based on the last month's salary. For certain
employees, including officers, the obligation for severance pay is
discharged by payment of premiums to insurance companies under approved
plans.
Certain classes of the Company's employees are included in a comprehensive
defined contribution pension plan for industrial workers and the Company is
contributing to a pension fund in order to secure a pension for such
employees. The Company contributes 6% to 13% of the employee's salary each
month to the pension fund. Contributions charged to operations were
approximately $120,000 and $98,000 in 2002 and 2001, respectively. Part of
the Company's contributions relates to the Company's liability for
severance pay for the period commencing from the date when the employee
joined the program. The amount required to cover the liability of the
Company for severance pay to such employees prior to their joining the
program was deposited with a severance pay fund. For employees other than
those referred to above, the Company's liability is covered by regular
payments to severance pay funds.
The amounts maintained with insurance companies and the pension fund are
not under control of the Company and therefore are not reflected in the
financial statements. The deposits presented in the balance sheet include
profits accumulated to the balance sheet date. The amounts deposited may be
withdrawn only after fulfillment of the obligations under the Severance Pay
Law as discussed above.
NOTE 13 INCOME TAXES
The American parent company and its American subsidiary and the Israeli
subsidiaries file separate tax returns. The Israeli companies are taxed in
Israel at a flat rate of 36% and are subject to the Israel Income Tax Law
(Inflation Adjustment) of 1985.Under this law, results of operations for
income tax purposes are measured in real terms in accordance with the
changes in the Israeli Consumer Price Index. The inflation adjustment is
expressed as financing costs or income and is applied as an adjustment to
book income for purposes of computing income taxes. The Company's plant
expansions were granted an approved status under the law for the
encouragement of capital investments and the income for the approved part
will be taxed at 25%.
19
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
Income tax expense (benefit) in United States Dollars for the years ended
December 31, 2002 and 2001 is as follows:
2002 2001
----------------- -----------------
Current United States $ (194,080) $ 6,828
Current Israel 269,665 338,412
Deferred Israel 237,453 (11,451)
----------------- -----------------
$ 313,038 $ 333,789
================= =================
The actual tax expense differs from the "expected" tax expense for the
years ended December 31, 2002 and 2001 (computed by applying United States
statutory rates and the Israeli tax rates to income before taxes) as
follows:
2002 2001
----------------- -----------------
Computed "expected" tax expense $ 416,925 $ 381,558
Non-tax deductible expenses 183,264 17,143
Inflationary adjustment (106,542) (11,451)
Tax exempt revenues or taxable at different rate (6,259) (53,461)
Prior year's taxes 19,730 -
Net operating loss carryforwards (194,080) -
----------------- -----------------
$ 313,038 $ 333,789
================= =================
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2002 and
2001 are as follows:
2002 2001
---------------- -----------------
Deferred taxes asset - current - in respect of:
Allowance for doubtful accounts $ 68,441 $ 65,305
Provision for vacation and supplementary holiday 20,853 32,456
---------------- -----------------
$ 89,294 $ 97,761
================ =================
20
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
Deferred taxes asset, net - non current - in respect of:
Depreciable fixed assets $ (13,246) $ (11,848)
Shares issued for employee services 47,240 50,957
Net operating loss carryforward (194,080) 361,580
Severance of employer/employee relations 7,629 -
Write-down of Israeli marketable securities 101,677 -
---------------- ----------------
Total gross deferred tax assets, non-current 337,380 -
Less valuation allowance (101,677) -
---------------- ----------------
$ 235,703 $ 400,689
================ ================
At December 31, 2002, the American parent company and its American
subsidiary had net operating loss carryforwards of approximately $571,000
for income tax purposes, available to offset future taxable income expiring
in 2022, which resulted in a deferred tax asset of $194,080. The American
parent company and its American subsidiary did not record a valuation
allowance at December 31, 2002 because it was more likely than not that
they would avail themselves of the tax benefit generated by the net
operating loss carryforwards.
At December 31, 2002, one of the Israeli subsidiaries incurred an
impairment loss due to other than temporary declines in the value of
marketable securities, available to offset future taxable gains on
marketable securities indefinitely. This resulted in a deferred tax asset
of $101,677, which was fully reserved at December 31, 2002. The valuation
allowance at December 31, 2001 was $0. The net change in the valuation
allowance during the year ended December 31, 2002 was an increase of
$101,677. At December 31, 2002, the Israeli net operating loss
carryforwards from prior years have been fully utilized.
NOTE 14 COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASE AGREEMENTS
1. Under a lease agreement dated January 1, 1998 between the Company and
a principal shareholder of the Company, the Company leases an
industrial building located in the Erez Industrial Zone (See Note
16(A)). The lease term is for one year and is renewable for an
additional period of one year at the end of each term. The annual rent
payments totaled approximately $85,500 based on the average exchange
rate for the latest period presented. The Company is subleasing
one-third of the building to its wholly owned subsidiary, Mayotex Ltd.
The sublease terms are identical to the Company's and the annual
proceeds from rent payments totaled approximately $14,400.
21
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
2. Under a lease agreement effective January 1, 1998, the Company leases
an industrial building located near the city of Netivot. The lease
term is for two years and is renewable up to an additional three
years. The annual rent payments totaled approximately $11,000 based on
the average exchange rate for the latest period presented. In January
2003, the lease was extended to December 31, 2004, and the annual rent
was reduced to approximately $10,000 indexed to the Israeli CPI.
3. Under a lease agreement effective January 1, 2002, the Company leases
an industrial building located in the Erez Industrial Zone. The lease
term is for one year and is renewable for an additional period of one
year at the end of each term. The annual rent payments totaled
approximately $19,200 based on the average exchange rate for the
latest period presented.
4. Under a lease agreement effective January 1, 2002, the Company leases
an industrial building located in the Ashdod Industrial Zone. The
lease term is for one year and is renewable for an additional period
of one year at the end of each term. The annual rent payments totaled
approximately $12,000 based on the average exchange rate for the
latest period presented. This building is owned by a related party
(See Note 16(A)).
5. Under a lease agreement effective January 1, 2001, the Company leases
an industrial building located in the Nazareth Industrial Zone. The
lease term is for three years expiring December 31, 2004. The annual
rent payments totaled approximately $180,000 based on the average
exchange rate for the latest period presented.
6. Under a lease agreement effective January 1, 2001, the Company leases
an industrial building located in the Petach Tiqwa Industrial Zone.
The lease term is for five years expiring December 31, 2005. The
annual rent payments totaled approximately $21,600 based on the
average exchange rate for the latest period presented.
7. The Company also owns an industrial building in the Erez Industrial
Zone. No mortgage or lien exists on this building.
Future minimum lease payments for the operating leases are as follows at
December 31, 2002:
YEAR Amount
----------- ----------------
2003 $ 211,600
2004 211,600
2005 21,600
----------------
$ 444,800
================
22
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
Rent expense under the operating leases for the years ended December 31,
2002 and 2001 was $359,505 and $421,825, respectively.
(B) AGREEMENTS
On October 24, 2002, the Company entered into a consulting agreement with
KPMG Corporate Finance, LLC ("KPMG") whereby KPMG shall act as the
Company's exclusive financial advisor and private placement agent. KPMG is
entitled to an engagement fee of $25,000 upon execution of the agreement
and an additional $25,000 for a retainer fee upon completion of the
Memorandum to be used in any private placement. KPMG will attempt to raise
up to $10,000,000 in a private placement of the Company's securities in
return for a success fee of 7.0% of the proceeds raised. KPMG will assist
the Company in identifying possible acquisitions including and up to final
negotiations in return for (1) 75% of KPMG's normal hourly fees and (2)
2.0% of the aggregate consideration paid by the Company including any
liabilities assumed.
On April 30, 2002, the Company entered into a one-year agreement with a
consultant whereby the consultant would assist the Company to raise
capital, develop business plans, handle investor relations and review
strategic business plans. In return, the Company agreed to issue an
aggregate of 1,200,000 shares (payable in quarterly installments of 300,000
shares each) of common stock valued at $3,000,000 the fair market value of
the common stock on the effective date of the agreement based on the
prevailing market price. After the initial 300,000 shares were issued, the
Company disputed the contract due to non-performance and began litigation
to reacquire the shares. In April 2003, the Company settled the dispute for
$108,000, all of which was recognized as consulting expense during 2002.
Pursuant to the settlement agreement, the Company received its 300,000
shares back in 2003. The reacquired shares are treated as never having been
issued as of December 31, 2002.
On July 30, 2002, the Company entered into a one-year agreement with a
consultant whereby the consultant would assist the Company with investor
relations. In return, the Company agreed to issue an aggregate of 700,000
shares (payable in quarterly installments of 175,000 shares each) of common
stock valued at $1,561,000, the fair market value of the common stock on
the effective date of the agreement based on the prevailing market price.
In December 2002, the agreement was canceled. To date, 150,000 shares
(shown as to be issued as of December 31, 2002) were issued in 2003 and no
other shares are due to the consultant (See Note 18). Accordingly, $334,500
was recognized as consulting expense during 2002.
On November 29, 2001, the Company entered into a one-year agreement with a
consultant whereby the consultant would assist the Company to acquire
public listing on a stock exchange, to raise capital and to settle disputes
the Company made against other companies. In return, the agreement requires
the Company to issue 10,000 shares of the Company's common stock monthly
and to reimburse the consultant for out of pocket expenses. For settling
the disputes, the consultant was also entitled to additional equity
compensation. The agreement with the consultant was itself disputed during
2002. Accordingly, the Company has accrued an aggregate amount of $111,069
under the agreement. No signed settlement has been reached.
23
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
On March 16, 1999, the Company entered into a limited partnership agreement
to operate in the field of production and marketing of helmets, for
exporting purposes only. On May 9, 2001, the partnership was terminated and
the Company purchased $7,200 of equipment and $12,900 inventory used in the
production of ballistic helmets including intangible knowledge. Thereafter,
the Company began manufacturing ballistic helmets and the results are
included in the accompanying consolidated financial statements.
In November 1998, the Company executed an agreement with a consultant
whereby the consultant would provide services with regard to assisting the
Company to become a public company in the United States. The fee to be paid
by the Company was $140,000 and a five-year transferable warrant to acquire
up to 250,000 registered shares of the Company's common stock at an
exercise price of $1.00 per share. The Company paid the consultant $130,000
from the period of its inception in 1998 through December 31, 2001 in full
settlement of this agreement. The warrants were valued at zero under the
Black-Scholes method since the exercise price greatly exceeded the
estimated fair market value of the shares of the Company and none of the
warrants were exercised. During 2002, the Company began litigation against
the consultant for failure to perform under the agreement. In May 2002, a
settlement was reached whereby the consultant waived his rights to the
warrants and reduced his ownership percentage in the Company by giving up
shares of Company stock.
(C) CONTINGENCIES
1. The Company's subsidiary, Achidatex, was sued for $476,000 by a former
employee, who claimed they were owed commissions plus withholding
differentials linkage and interest. The Company filed a counter-claim
against the employee, for a declaratory verdict of breach of
employment contract and also filed a claim against the employee in the
amount of $131,000 for breach of trust. In January 2002, the Company
reached a settlement out of court with the employee amounting to
$45,520, which was included in accrued expenses in the consolidated
balance sheet at December 31, 2001.
2. The Company's subsidiary, Achidatex, received grants in the past from
the Fund for Encouragement of Foreign Sales at the Ministry of
Industry and Trade. The Company is required to pay royalties of 3%
from the additional export each year compared with the calendar year
in which its plan was submitted. The balance of the grants received
less the royalties paid at December 31, 2002 and 2001 is $48,513 and
$54,721, respectively.
24
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
3. In addition, liens remain on the assets of the Company's subsidiary,
Achidatex, in favor of the State of Israel in respect of grants that
the Company received in the past and for which the Company received
final implementation approval in the past. These liens have not yet
been removed.
NOTE 15 SHAREHOLDERS' EQUITY
(A) RECAPITALIZATION
On March 25, 2002, Pawnbrokers Exchange, Inc. ("PEI"), a reporting public
company with no assets, liabilities or operations at that time, consummated
a share exchange agreement (the "Agreement") with Export Erez USA, Inc.,
("Export USA") a company incorporated in Delaware whereby all of the
shareholders in Export USA had their shares converted into 21,000,000
shares or 84% of the common stock of PEI. PEI had 4,000,000 shares
outstanding immediately prior to the recapitalization.
Under generally accepted accounting principles, a company whose
shareholders receive over fifty percent of the stock of the surviving
entity in a business combination is considered the acquirer for accounting
purposes. Accordingly, the transaction was accounted for as an acquisition
of PEI and a recapitalization of Export USA. The consolidated financial
statements subsequent to the acquisition include the following: (1) the
balance sheet consists of the net assets of PEI at historical costs (zero
at the acquisition date) and the net assets of Export USA and subsidiaries
at historical cost. (2) the statement of operations consists of the
operations of Export USA and subsidiaries for the period presented and the
operations of PEI from the recapitalization date.
(B) ISSUANCES OF COMMON STOCK
On April 8, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company issued 100,000 shares of common stock in
return for future consulting services. The 100,000 shares were valued at
$172,000, the fair market value of the common stock on the grant date based
on the prevailing market price. Consulting expense of $129,000 was
recognized during 2002 and $43,000 is reflected as a deferred consulting
expense component of equity.
Effective June 18, 2001, the Company issued 1,050,008 shares of its common
stock to acquire a 76% interest in Achidatex Nazareth Elite (1977) (See
Note 3).
25
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 16 RELATED PARTIES
(A) TRANSACTIONS WITH RELATED PARTIES
The Company has signed lease agreements with the principal shareholder of
the Company and a sublease agreement with its wholly owned subsidiary,
Mayotex Ltd. (See Note 14(A)(1)). The Company's subsidiary, Achidatex, has
signed lease agreements with a company owned by minority shareholders of
Achidatex (See Note 14(A)(4)).
(B) INCOME AND (EXPENSES) FROM TRANSACTIONS WITH RELATED PARTIES
2002 2001
---------------- ----------------
Salaries and related expenses $ (169,018) $ (158,994)
Lease and rent expenses (270,330) (176,066)
Income from management fee - 12,815
(C) BALANCES WITH RELATED PARTIES
(I) ACCOUNTS RECEIVABLE
2002 2001
---------------- ----------------
Customers in Israel
Open accounts - related parties $ 290,515 $ 268,810
Less allowance for doubtful accounts (81,350) (87,751)
---------------- ----------------
$ 209,165 $ 181,059
================ ================
Trade accounts receivable - related parties are due from two companies (the
"affiliates") whereby the principal shareholder of the Company is a
principal shareholder of those affiliates. The receivable resulted from the
sale of products in a prior year in the normal course of business. Certain
amounts are in dispute and the Company has initiated legal proceedings.
Although the Company believes it will prevail in the legal proceedings,
full collection is doubtful. Therefore, an allowance has been established.
(II) NOTE RECEIVABLE - OFFICER
On January 15, 2002, the Company made an advance of $400,000 on behalf of
the Company's controlling shareholder who is also an officer of the
Company. The note was for a term of eleven months and matured December 15,
2002, bore interest of 8% and required quarterly prepaid interest payments
only. At December 31, 2002, the note receivable was still outstanding and
had a balance of $380,986. In 2003, the officer plans to settle the note as
follows: (1) pay $75,960; (2) offset $20,598 of payments by the officer on
behalf of the Company; (3) forfeit one year of lease payments amounting to
$84,428 (See Note 16(A)); (4) deliver 327,869 shares of the Company's
common stock held by the officer valued at $200,000. As this note was not
satisfied at maturity, it is deemed to be a violation of the newly enacted
Sarbanes Oxley Act of 2002. As indicated above, the Company intends on
remedying this in 2003. Uncertainty exists as to the ultimate resolution of
the matter and whether such resolution will have a material impact on the
Company's consolidated financial position and results of operations. There
are no accruals in the accompanying consolidated balance sheet at December
31, 2002, for this uncertainty.
26
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
For additional related party transactions, see Notes 4, 10 and 11.
NOTE 17 SEGMENT INFORMATION AND CONCENTRATIONS
(A) SALES AND INCOME FROM OPERATIONS:
1. Segment information:
Civilian Military Military Consolidated
Local Local Export
-------------- -------------- -------------- ------------
December 31, 2002
Net Sales $ 3,117,066 $ 4,919,567 $ 2,592,967 $ 10,629,600
Income from operations 433,628 559,295 226,365 1,219,288
December 31, 2001
Net Sales $ 2,652,696 $ 4,959,197 $ 1,329,120 $ 8,941,013
Income from operations 340,078 591,411 176,920 1,108,409
2. Sales to Single Customers Exceeding 10% of Sales
2002 2001
----------------- -----------------
Customer A $ 4,715,769 $ 3,940,697
Customer B $ 1,320,356 $ -
27
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
NOTE 18 SUBSEQUENT EVENTS
Effective January 1, 2003, the Company entered into a licensing agreement
with a firearms manufacturer to use the manufacturer's trademarks in
connection with the manufacture and sales of the Company's armored vests
and apparel and armored wall fabric products worldwide. The agreement
expires June 30, 2006, but can be extended upon mutual agreement for an
additional three-year term. The agreement requires the Company to pay a
royalty of 5% of net sales of products with the licensee's trademarks with
a minimum guaranteed royalty of $50,000 for the first contract period
(January 1, 2003 through June 30, 2004), $100,000 for the second contract
period (July 1, 2004 through June 30, 2005) and $150,000 for the third
contract period (July 1, 2005 through June 30, 2006) with each payment due
within 30 days following the end of the previous calendar quarter
commencing April 30, 2003. The agreement also requires the Company to spend
a minimum of 4% of the net sales from the licensed products for promotional
activities.
28